Pranava Electronics Private Limited Vs ACIT (ITAT Bangalore)
An Invoice Raised by Mistake Cannot Create Income; Rule 8D Cannot Be Applied by Default
A difference between two tax returns may justify an enquiry. But does it justify an addition even after the underlying agreement, books and actual receipts explain the difference? Similarly, can the Assessing Officer apply Rule 8D merely because an assessee has earned exempt income and made only a small disallowance on its own? The Bangalore Tribunal addressed both questions in favour of the assessee.
Higher rent in service tax return: what had happened?
Pranava Electronics Private Limited had reported rental receipts of ₹9,00,93,330 in its income-tax return, whereas its service tax return reflected ₹9,10,39,362. The Assessing Officer treated the difference of ₹9,46,032 as rental income that had escaped assessment.
The company explained that, for June to August 2016, it had mistakenly raised monthly invoices of ₹36,11,533, although the correct monthly rent was ₹32,96,186. The excess of ₹3,15,347 per month accounted for the entire difference. Service tax had been paid on the higher invoiced amount, and the excess service tax was adjusted subsequently. The company maintained that its books and income-tax return reflected the rent actually received.
The AO made the addition on the ground that supporting evidence had not been furnished before him. The CIT(A) sustained it. Before the Tribunal, however, the assessee placed the invoices and evidence of the actual rent receipts alongside its explanation.
What was actually due and received?
The Tribunal examined the agreement, the parties’ conduct, the invoices and the books of account. It found that the higher invoices were erroneous and inconsistent with the agreed rent. The assessee had not received the disputed ₹9,46,032.
The Tribunal therefore directed deletion of the addition, holding that only real income could be taxed. The figure reported in a service tax return was relevant to the enquiry, but it did not establish that the excess amount had accrued as rent when the underlying evidence showed otherwise.
This part of the ruling depends on the factual proof. A mere assertion that invoices were raised by mistake would have been considerably weaker. Here, the assessee could connect the three incorrect invoices to the exact difference, demonstrate the rent actually received and explain the subsequent service tax adjustment.
Section 14A: the AO’s calculation was not the first step
The company had investments of about ₹25.87 crore and had earned exempt income. In its computation, it identified ₹11,956 as expenditure relating to that income and disallowed the amount voluntarily. Its position was that no further expenditure had been incurred for earning the exempt income.
The AO was unconvinced and computed a disallowance of ₹25,99,736 under Rule 8D. After giving credit for the company’s voluntary disallowance of ₹11,956, he added the balance ₹25,87,780. The CIT(A) upheld the addition.
The Tribunal focused on the sequence prescribed by section 14A(2). Before invoking Rule 8D, the AO had to examine the assessee’s accounts and record dissatisfaction with the correctness of its claim about expenditure relating to exempt income. The AO had asked questions about the investments and exempt income, but had not examined the claim against the accounts or recorded why the identified expenditure of ₹11,956 was incorrect. Nor had he recorded a finding that further expenditure had actually been incurred.
The Tribunal held that the required satisfaction was a precondition for applying Rule 8D. Since it was absent, the additional disallowance could not stand. It directed the AO to delete ₹25,87,780, while retaining the assessee’s own disallowance of ₹11,956. This approach is consistent with the requirement discussed in PCIT-3 Vs DLF Home Developers Ltd (Supreme Court), where the absence of the requisite dissatisfaction before applying Rule 8D was material.
The book profit ground
The assessee had also challenged an alleged addition to book profit under section 115JB. On examining the computation, the Tribunal found no corresponding addition to book profit. It therefore dismissed that ground as unfounded. Although the assessee obtained relief on both substantive additions, the appeal was formally partly allowed.
Author’s comments
The two issues illustrate the importance of examining what a figure represents before taxing it. A higher invoice and a corresponding service tax return entry may create an apparent mismatch, but the enquiry cannot end there. Where the contractual rent, actual receipts and accounting records establish a lower amount, the erroneous invoice does not by itself create income. The practical lesson is to preserve the agreement, invoice trail, receipt details and evidence of any tax adjustment so that the mismatch can be explained precisely.
On section 14A, the ruling does not say that an assessee’s voluntary disallowance must always be accepted. It says that Rule 8D cannot replace the AO’s examination of the accounts. If the AO considers the assessee’s claim incorrect, the reasons for that dissatisfaction must be recorded before the prescribed formula is used. In this case, that statutory step was missing; consequently, the Tribunal retained the company’s ₹11,956 disallowance but removed the additional Rule 8D amount.
Cases Discussed
- Pranava Electronics Private Limited, ITA No. 84/Bangalore/2019, dated 17 July 2019 (ITAT Bangalore)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. Pranava Electronics Private Limited (the assessee/appellant/company) has filed this appeal for Assessment Year 2017–18 against the appellate order dated 27 August 2024 passed by the National Faceless Appeal Centre (NFAC), Delhi (the learned CIT(A)). That order disposed of the assessee’s appeal against the assessment order dated 27 December 2019, passed under section 143(3) of the Income-tax Act, 1961 (the Act), by the Assistant Commissioner of Income Tax, Circle 5(1)(2), Bangalore (the learned Assessing Officer). The learned CIT(A) upheld the disallowance of ₹2,567,780 under section 14A read with Rule 8D, both in the normal computation of total income and in the computation of book profit for minimum alternate tax under section 115JB of the Act. The learned CIT(A) also upheld the disallowance of ₹946,032, representing the difference between the rental income actually received by the assessee and the rental income reported in its service tax return.
2. The Assessee has raised the following grounds of appeal:
1. That the order of the authorities below in so far as it is against the appellant is against the law, facts, circumstances, natural justice, equity and all other known principles of law.
2. That the total income computed and the total tax computed is hereby disputed.
3. That the NFAC erred in not communicating their order dated 27.08.2024 by following the provisions of section 144B of the Act. The order was not communicated through the mandatory electronic mode either via email or SMS.
4. The Learned authorities below erred in making addition of Rs. 9,46,032/- on alleged difference in rent receipts as per income tax returns and service tax returns.
5. The Learned authorities below erred in making disallowance u/s 14A r.w.r 8D of the Act amounting to Rs. 25,87,780/-.
6. The Learned authorities below erred in not restricting the disallowance u/s 14A rwr 8D of the Act to the actual expenditure incurred which has a nexus for earning exempt income.
7. The Learned authorities below erred in adding the disallowance/addition made to the book profit u/s 115JB of the Act.
8. The appellant denies the liabilities for interest u/s 234B of the Act. Further prays that the interest if any should be levied only on returned income.
9. No opportunity has been given before the levy of interest u/s 234B of the Act.
10. Without prejudice to the appellant’s right of seeking waiver before appropriate authority the appellant begs for consequential relief in the levy of interest u/s 234B of the Act.
11. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered.
3. Ground Nos. 1, 2, and 3 are general in nature; Ground No. 8 is consequential; and Ground Nos. 9 to 11 are also general and were not pressed. They are therefore dismissed.
4. Accordingly, the assessee challenges the addition of ₹946,032 under Ground No. 4 and the disallowance of ₹2,587,780 under Ground Nos. 5 to 7.
5. The assessee is a company engaged in providing IT-enabled and business process outsourcing services. It filed its return of income on 2 November 2017, declaring total income of ₹44,227,260. The return was selected for complete scrutiny, and notice under section 143(2) of the Act was issued on 9 August 2018.
6. The learned Assessing Officer noted that rental receipts of ₹91,039,362 were reported in the service tax return, whereas ₹90,093,330 was reported in the income-tax return, resulting in a difference of ₹946,032. In response to the show-cause notice, the assessee explained that it had mistakenly raised monthly rent invoices of ₹3,611,533 for June to August 2016, although the correct monthly rent received was ₹3,296,186. This resulted in a difference of ₹946,032. The assessee further stated that it had paid service tax on the full invoiced amount, while recording only the rent actually received in its books and income-tax return, and that it adjusted the excess service tax in the following year. The learned Assessing Officer made the addition because the assessee did not furnish supporting documents or evidence.
7. The second issue in the assessment concerned disallowance under section 14A read with Rule 8D of the Act. The financial statements showed investments of ₹25.87 crore as at 31 March 2017. The assessee was asked to furnish monthly investment ledgers, which showed investments in equity shares, mutual funds, and bonds, from which it earned exempt income of ₹41,215,587. The assessee had debited expenditure of only ₹11,956 in relation to these investments or the exempt income. When asked why section 14A read with Rule 8D should not be applied, the assessee stated, by letter dated 29 May 2019, that only ₹11,956 had been charged to the profit and loss account for earning exempt income and had already been disallowed, and that no other expenditure related to such income is incurred. The learned Assessing Officer nevertheless computed a disallowance of ₹2,599,736 under Rule 8D. After reducing the assessee’s own disallowance of ₹11,956, he made a net disallowance of ₹2,587,780 and passed the assessment order under section 143(3) of the Act on 27 December 2019.
8. Aggrieved, the assessee appealed both disallowances to the learned CIT(A). By appellate order dated 27 August 2024, the learned CIT(A) upheld the addition of ₹946,032 and the disallowance of ₹2,587,780 under section 14A of the Act, affirming the findings of the learned Assessing Officer.
9. Aggrieved by the assessment and appellate orders, the assessee filed the present appeal. We heard Shri DR. K. R. Pradeep, Advocate, for the assessee, and Shri Pradeep S., Additional Commissioner of Income Tax, for the Revenue.
10. Regarding the addition of ₹946,032, the learned authorized representative reiterated the submissions made before the learned Assessing Officer. He contended that the difference arose solely from an invoicing error and that the actual rent received was lower by ₹946,032. He also submitted a detailed statement of the rent received during the relevant assessment year. According to him, the addition should be deleted because the learned CIT(A) did not consider the assessee’s explanation and merely affirmed the Assessing Officer’s findings after reproducing them in the appellate order.
11. On the disallowance under section 14A of the Act, the learned authorised representative relied on the coordinate Bench’s decision in the assessee’s own case in ITA No. 84/Bangalore/2019 dated 17 July 2019, placed at pages 19 to 26 of the paper book, and submitted that it should be followed. Alternatively, he argued that the learned Assessing Officer had not recorded dissatisfaction with the assessee’s suo motu disallowance of ₹11,956. In the absence of such satisfaction, he contended that the entire addition should be deleted.
12. The learned Departmental Representative strongly supported the orders of the lower authorities.
13. We have considered the rival submissions, the orders of the lower authorities, the written submissions, and the material in the paper book.
14. Ground No. 4 concerns the addition of ₹946,032 arising from the alleged difference between the rent reported in the income-tax return and the service tax return. The learned Assessing Officer found that the assessee had raised monthly rent invoices of ₹3,611,533 to Autoliv India Private Limited, whereas it actually received ₹3,296,186 per month. The monthly difference of ₹315,347 for three months resulted in the addition of ₹946,032. The assessee produced the invoices and evidence of the rent actually received, and it was also shown that credit for the excess service tax charged on the erroneous higher invoices was taken subsequently. As the assessee did not receive the disputed amount, only the real income could be taxed. The erroneous invoices were inconsistent with the agreement, while the actual receipts were supported by the parties’ agreement, conduct, and books of account. We therefore direct the learned Assessing Officer to delete the addition of ₹946,032. Ground No. 4 is allowed.
15. Ground No. 5 concerns the disallowance of ₹2,587,780 under section 14A read with Rule 8D of the Act, as sustained by the learned Assessing Officer and the learned CIT(A). We find no corresponding addition in the assessee’s computation of book profit, as alleged in Ground No. 7. Ground No. 7 therefore appears to have been raised by mistake, and no grievance on that issue has been established. The disallowance under section 14A nevertheless remains in the normal computation of total income.
16. The assessment order shows that the learned Assessing Officer questioned the assessee about its investments of ₹25.87 crore as at 31 March 2017 and the exempt income of ₹11,215,587 earned from them. In its computation of total income, the assessee had identified and disallowed expenditure of ₹11,956 incurred in relation to the exempt income. Its response, reproduced in the assessment order, stated that this was the only expenditure incurred for earning exempt income and that no further expenditure was attributable to it.
17. The learned Assessing Officer proceeded to compute the disallowance under Rule 8D of the Income-tax Rules. Although an Assessing Officer may apply Rule 8D for disallowance under section 14A, that authority is subject to the conditions in section 14A(2). Before invoking the prescribed method, the Assessing Officer must examine the assessee’s accounts and record dissatisfaction with the correctness of its claim regarding expenditure incurred in relation to income that does not form part of total income. Here, the assessee claimed that ₹11,956 was the only expenditure incurred to earn exempt income and that no further expenditure was attributable to it. The learned Assessing Officer neither examined the correctness of that claim with reference to the accounts nor recorded a finding that the assessee had incurred greater expenditure. He therefore failed to record the satisfaction required before invoking Rule 8D.
18. It is settled by several judicial precedents, including decisions of the Hon’ble Supreme Court, that recording such satisfaction is a prerequisite to applying the computation mechanism under Rule 8D. That requirement was not met in this case. The disallowance made by the learned Assessing Officer and sustained by the learned CIT(A) is therefore contrary to section 14A(2) of the Act and cannot be upheld. We direct the learned Assessing Officer to delete the additional disallowance while retaining the assessee’s suo motu disallowance of ₹11,956. Ground No. 5 is allowed.
19. Ground No. 6, being supportive of Ground No. 5, is also allowed. Ground No. 7 is unfounded and is dismissed.
20. In the result, the assessee’s appeal is partly allowed.
Order pronounced in the open court on 28th September, 2026.
