ACIT Vs NDL Ventures Limited (ITAT Mumbai)
Facts/Background
The appeal was filed by the Revenue against the order dated 29.03.2025 passed by the Ld. Commissioner of Income-tax (Appeals)-48, Mumbai [Ld. CIT(A)] for Assessment Year (A.Y.) 2018-19 in ITA No. 3899/MUM/2025, involving NDL Ventures Limited. The assessee is engaged in the business of Media and Communication, trading in securities, real estate, etc.
For A.Y. 2018-19, the assessee filed its return of income on 25.10.2018. The return was processed under Section 143(1) of the Income-tax Act, 1961. Subsequently, the case was selected for scrutiny. During the assessment proceedings, the Assessing Officer (AO) observed that the assessee made investments in equity shares yielding exempt income of ₹10,88,15,186/- during the year. The assessee submitted that it had earned exempt income and had suo moto disallowed ₹5,01,67,393/- under Section 14A. The AO invoked Section 14A read with Rule 8D, computed the total disallowance at ₹10,88,15,186/-, and added the differential amount of ₹5,86,47,793/- back to the assessee’s income. Additionally, the AO made a disallowance regarding Section 80G deduction for Corporate Social Responsibility (CSR) expenditure under Section 135 of the Companies Act, 2013, holding it to be specially prohibited under Section 37(1) of the Act.
Aggrieved, the assessee appealed before the Ld. CIT(A).
Grounds of Appeal
The Revenue raised the following grounds before the Income Tax Appellate Tribunal (ITAT):
- Whether the Ld. CIT(A) erred in deleting the addition of ₹5,86,47,793/- made by the Assessing Officer under Section 144/14A of the Act.
- Whether the Ld. CIT(A) was right in restricting the disallowance to the suo moto disallowance made by the assessee of ₹5,01,67,393/-.
- Whether the Ld. CIT(A) erred in deleting the disallowance in view of the Explanation to Section 14A inserted by the Finance Act, 2022, which clarifies that the section applies and deemed to have always applied where exempt income has not accrued, arisen, or been received during the previous year.
- Whether the Ld. CIT(A) was right in relying on judicial decisions such as State Bank of Patiala (2018) and CIT v. Joint Investment Pvt. Ltd. (2015), which predate the amendment made by insertion of the Explanation to Section 14A by the Finance Act, 2022.
- Whether the statutory nature of CSR expenditure under Section 135 of the Companies Act, 2013 can be treated as a voluntary donation eligible for deduction under Section 80G of the Income Tax Act, 1961.
- Whether allowing deductions under Section 80G for CSR expenses undermines the objective of mandating CSR as a separate statutory obligation under the Companies Act, 2013.
CIT(A) Findings and Judicial Reasoning
The Ld. CIT(A) carefully considered the written submissions, AO’s observations, and various decisions of the High Courts and Income Tax Appellate Tribunals. The Ld. CIT(A) held that disallowance under Section 14A read with Rule 8D cannot exceed the amount of exempt income earned during the year.
To support this finding, the Ld. CIT(A) relied upon multiple judicial precedents:
- The Supreme Court in State Bank of Patiala (2018) and the Delhi High Court in CIT v. Joint Investment Pvt. Ltd. (2015) held that disallowance under Section 14A is restricted to the extent of exempt income earned by the assessee.
- The Delhi High Court in Caraf Builders and Constructions P. Ltd. (2019), relying on Pr. CIT v. McDonalds India (P) Ltd., Maxopp Investments Ltd. v. CIT, Cheminvest v. CIT, and CIT v. Holcim (P.) Ltd., affirmed that upper disallowance cannot exceed exempt income.
- The Delhi High Court in Holcim India Pvt. Ltd. (referring to P&H HC decisions in Lakhani Marketing Inc., Hero Cycles Ltd., and Winsome Textile Industries Ltd.; Gujarat HC in Cortech Energy (P) Ltd.; and Allahabad HC in Shivam Motors (P.) Ltd.) held that Section 14A cannot be invoked when no exempt income is earned.
- The Madras High Court in Marg Ltd. v. CIT held that Rule 8D cannot exceed the ceiling limit of Section 14A itself, as commercial prudence does not permit spending more to earn less, and disallowance cannot exceed the dividend income itself.
- Decisions of the Supreme Court in Delhi International Airport Pvt. Ltd. (2022), Pr. CIT v. Oil Industry Development Board, CIT v. Chettinad Logistics (P.) Ltd., and Pr. CIT v. GVK Project & Technical Services Ltd., along with Madras High Court in Tamilnadu Road Development Co. Ltd. and Gujarat High Court in Pr. CIT v. Dipesh Lalchand Shah and Pr. CIT v. Adani Wilmar Ltd., affirmed that no disallowance under Section 14A read with Rule 8D can be made in the absence of exempt income.
- The Delhi High Court in ACB India Ltd. and Special Bench ITAT in Vireet Investments Pvt. Ltd. held that only investments yielding exempt income should be considered in Section 14A computations.
Accordingly, the Ld. CIT(A) directed the AO to restrict the Section 14A disallowance to ₹5,01,67,393/- (to the extent of suo moto disallowance made by the assessee).
ITAT Analysis and Decision
Before the ITAT, the Ld. Counsel for the assessee relied on the jurisdictional High Court decision in Tata Industries Ltd.
The ITAT observed that the position of law is well settled: disallowance under Section 14A cannot exceed the exempt income earned during the relevant previous year. This principle has been consistently affirmed by the Supreme Court and various High Courts. The ITAT found that the Ld. CIT(A) correctly applied this settled principle by restricting the disallowance to the extent of exempt income / suo moto disallowance made by the assessee.
The Tribunal held that the Revenue’s contention seeking enhancement of disallowance beyond exempt income is contrary to the settled legal position and cannot be sustained. Consequently, the findings of the Ld. CIT(A) on this issue were upheld, and Ground Nos. 1 to 4 of the Revenue’s appeal were dismissed.
