Case Law Details
Ahluwalia Contracts India Ltd. Vs ACIT (ITAT Delhi)
In this case, the appeal arose from an assessment order passed under Section 143(3) of the Income Tax Act, 1961 for Assessment Year 2023–24, wherein the Assessing Officer (AO) made a disallowance of ₹6,28,000 under Section 14A read with Rule 8D. The disallowance was made on the basis that the assessee held investments capable of generating exempt income, despite no such disallowance being made by the assessee in its return.
During assessment proceedings, the AO issued a show-cause notice seeking justification for non-applicability of Section 14A. The assessee contended that the provisions were not applicable, as investments were made from reserves and surplus and no exempt income was earned during the year. The AO rejected the explanation and proceeded to make the disallowance.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance. While acknowledging judicial precedents cited by the assessee that disallowance under Section 14A is not warranted in the absence of exempt income, the CIT(A) relied on the amendment introduced by the Finance Act, 2022. The CIT(A) interpreted the Explanation to Section 14A as extending its applicability even to cases where no exempt income was earned during the year, provided expenditure was incurred in relation to investments capable of generating exempt income.
Before the Tribunal, the assessee argued that the AO failed to record satisfaction regarding the incurrence of expenditure in relation to exempt income, which is a prerequisite for invoking Section 14A. It was also contended that dividend income had become taxable from Assessment Year 2021–22 onwards due to amendments to Section 10(34), and therefore, no exempt income existed either in fact or in law during the relevant year. Consequently, Section 14A could not be invoked.
The Tribunal examined the findings of the CIT(A) and disagreed with the interpretation of the amended provisions. It emphasized that the fundamental condition for invoking Section 14A is the existence of income that does not form part of total income (i.e., exempt income). The Tribunal observed that dividend income is no longer exempt following the amendment effective from Assessment Year 2021–22. Therefore, even if dividend income had been earned, it would have been taxable.
The Tribunal held that since there was no exempt income in the relevant year, the basic condition for applying Section 14A was not satisfied. It further noted that the disallowance mechanism under Section 14A cannot operate in the absence of exempt income. Accordingly, the Tribunal concluded that the disallowance made by the AO and confirmed by the CIT(A) lacked a valid foundation.
As a result, the Tribunal deleted the disallowance of ₹6,28,000 and allowed the appeal of the assessee.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the Revenue is directed against the order dated 29.09.2025 of the Ld. Commissioner of Income Tax (Appeals)-30, New Delhi-110055 [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the Assessment Order dated 04.03.2025 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) by the Assessing Officer, ACIT, Central Circle-31, New Delhi, (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2023-24.
2. The assessee has raised the following grounds of appeal:
“ 1. On the facts and in the circumstances of the case and in law the Ld. NFAC/CIT(A) erred in –
a. determining taxable income at Rs.6,28,000/- against returned income in a sum of Rs.2,68,28,06,420/-;
b. Rs. 6,28,000/- being the amount of disallowance made u/s 14A r.w.s. Rule 8D of the I.T. Rules, 1962;
The above actions being arbitrary, fallacious, unwarranted and opposed to principles of natural justice must be quashed with directions for appropriate relief.
2.1 The AO noted that the assessee had non-current investment of Rs. 628 lacs as on 31.03.2021 but no disallowance u/s 14A of the Act was made by the assessee. The AO issued a show-cause notice to the assessee asking it to explain as to why disallowance u/s 14A of the Act r.w Rule 8D of the IT Rules, 1962 should not be made. After considering the reply of the assessee, the AO made a disallowance of Rs. 6,28,000/- u/s 14A of the Act.
3. In the appeal filed by the assessee, the Ld. CIT(A)-30, Delhi confirmed the order of the AO making an addition of Rs. 6,28,000/- u/s 14A of the Act r/w Rule 8D of the IT Rules, 1962 has been confirmed.
3.1 The facts of the case, the reason for the disallowance and the confirmation by the Ld. CIT(A) alongwith the submission of the assessee is stated in the written submission of the assessee, which is reproduced as under:
2.1 The brief facts of the case are that the Appellant herein, a Private Limited Company, is a building contractor of international repute. It submitted a return of income u/s. 139[1] of the Act declaring an income of Rs 268.28 Crores+. The assessment was completed u/s. 143(3) of the Act on 04.03.2025 after making an addition of Rs. 6.28.000/-u/s 14A of the Act read with Rule 8D of the Rules. The calculation with regard to the addition is to be found on pages 3 and 4 of the assessment order.
2.2 The Appellant had filed First Appeal against that addition made by the Assessing Officer in assessment. The Ld. CIT(A)-30, for reasons stated in para 8 on pages 15 and 16 of the impugned order, has confirmed the addition. It is in this background that the following Grounds of Appeal have been taken in this appeal:-
GROUNDS:
3. The Grounds of Appeal are as under:-
On the facts and in the circumstances of the case and in law the Ld. NFAC/CIT(A) erred in-
a. determining taxable income at Rs. 6.28,000/- against returned income in a sum of Rs. 2.68.28.06. 420/-
b. Rs.6.28.000/- being the amount of disallowance made u/s 14A r.w.s. Rule BD of the I.T. Rules, 1962
The above actions being arbitrary, fallacious, unwarranted and opposed to principles of natural justice must be quashed with directions for appropriate relief.
SUBMISSIONS:
4.1 The Assessee was put to question by the AO during the course of the assessment proceedings as to why an addition u/s. 14A of the Act ought not to be made. The reply given by the Assessee is mentioned in the assessment order in para 3. Quated verbatim, it reads as under:-
“The provision of Section 14A(1)(2) & (3) read with Rule 8D of the Act are not applicable in the case of the assessee during the year under assessment in view of the facts stated hereunder as appearing in the Audited Balance Sheet and Profit & Lass Accounts for the year ending 31 March 2023. The investment in Unquoted shares appearing as on 31st March 2023 were made much earlier to ever Asst. Year 2000-2001 ie prior to 1-4-99 out of Reserves & Surplus Funds Assessee had sufficient Reserve and Surplus out of which such investments were made.”
4.2 The reply of the Assessee was found unsatisfactory and untenable by the AO. The AO ruled that Sec. 14A of the Act r/w Rule 8D of the Rules applied in the facts of the case. After so opining, he added a sum of Rs. 6.28.000/- to the declared income.
4.3 In appeal before the CIT(A) Assessee contended that the addition as made by the AO was erroneous and unwarranted in the face of the following decisions:-
I. CIT vs. GVK Project and Technical Services Ltd. (2019) 106 taxmann.com 181
II. (SC); Pr.CiT vs. Carat Builders & Constructions (P) Ltd. (2019) 112 com 322(SC).
III. Cheminvest id vs Cif (2015) 61 com 118 (Del)
IV. CIT vs. Reliance Ports and terminal ltd (2070) 114 fowmorn.com 579 (Bom.HC):
V. CIT vs. State Bank of Patiala (2018) 99 taxmann.com 266/3C)
VI. CIT vs. Lakhani Marketing Inc. (2014) 226 Taxmann 45 (P&H)
VII. CIT vs. Reliance Industries & Power Ltd. (2009) 313 TR 340
VIII. CIT vs India Gelatine and Chemicals Ltd. (2015) 376 (TR 353/04)
IX. ACIT vs. Dhampur Sugar Mill Pvt. Ltd. (2015) 54 com 158(AR) &
X. CIT vs. Taikisha Engineering India Ltd. (2015) 54 com 109/Dell
4.4 The Ld. CIT(A) while agreeing with the ratio of the above said decisions yet confirmed the addition on the ground that the Section itself stood amended through the insertion of an Explanation by the Finance Act, 2022 applicable from AY 2022-23. He held that in view of the Explanation, the action of the AO was correct and merited to be confirmed.
ARGUMENTS:
5.1 The AO while making the addition completely missed the point that there was an onus on him to establish that the Assessee had indeed incurred expenditure in earning tax free income. To that effect, he was required to record a specific satisfaction. This is what the Apex Court has held in Maxopp Investment Ltd. vs. CIT (2018) in para 41 on pages 668 and 669 of the Report:-
“Having regard to the language of section 144(2) of the Act, read with rule 80 of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct. it will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment in that eventuality, it will have to record in satisfaction to this effect Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the Assessing Officer.”
5.2 Without recording a satisfaction the AO had no authority or jurisdiction to tamper with the income as declared in the name of Sec.14A of the Act and thereafter proceed to make an addition. His having done so is clearly against the mandate of the Apex Court and so against law.
5.3 The AO also misunderstood and misinterpreted the provision itself calling for a disallowance u/s. 14A of the Act. According to the AO the unquoted investments ought to have produced dividend income and which being exempt attracted the provisions of Sec. 14A of the Act. Both the AO and CIT(A) ignored the fact that dividend income, even if realised by the Appellant during the year was not exempt. The income from dividend was taxable in AY 2023-24 by virtue of amendment to Sec. 10(34) of the Act by the Finance Act. 2020 w.e.f. AY 2021-22. So with there being no exempt income as per law provisions of Sec.14A of the Act could not be invoked at all. Sec. 14A of the Act had neither any relevance nor any application both on facts and law in the subject year.
5.4 The provision could not have been invoked solely in a situation where there was exempt income. There ought to have been expenses too incurred in that behalf. In the subject case there was no exempt income at all either on fact or in law. The accretion of income on facts has been stoutly denied by the Assessee on facts. So is the fact of not incurring any expenditure in that behalf.
5.5 The Ld. CIT(A) committed a serious error of judgment in reading the Explanation solely for the condition of incurring of expenses for the generation of exempt income. The Ld.CIT(A) completely missed the point that since there was no exempt income at all so Sec.14A of the Act with its prescriptions could not have been invoked at all under any circumstance.
PRAYER
6. Since the action of the Authorities below are palpably erroneous and patently illegal. They merit to be quashed with relief to the Assessee being ordered.
(emphasis supplied by us)
4. On the other hand, the Ld. Sr. DR relied upon the orders of the authorities below.
5. We have heard both the parties and perused the material available on record. The Ld. CIT(A) confirmed the disallowance made by the AO by observing that however, after the amendment to Section 14A by the Finance Act, 2022, effective from AY 2022-23, disallowance under Section 14A read with Rule 8D is applicable even if no exempt income is earned in the current year. The Ld. CIT(A) further observed that this Explanation clarifies, for the removal of doubts, that the provisions of Section 14A shall apply even in cases where no exempt income has accrued, arisen, or been received during the previous year, but expenditure has been incurred in relation to such income. The relevant extracts of the order of the Ld. CIT(A) are reproduced as under:
“8.1 The appellant has primarily submitted that there is no exempt income so sec. 14 A is not applicable. The appellant has also placed reliance on several judgements of Hon’ble Courts in which it was decided that no disallowance u/s 14A shall be made in case no exempt income has been earned by the tax payer in that particular year. The ratio of the decision of the jurisdictional Delhi High Court in the case of Cheminvest Limited v. CIT (2015) ΙΤΑ 749/2014 dated 02.09.2015 is applicable in the case of the appellant. In that case, question before Hon’ble Delhi High court was whether disallowance under section 14A. of the Act can be made in a year in which no exempt income has been earned or received by the assessee. Hon’ble Delhi High Court after relying on its own judgment in Holcim India (P) limited held that no exempt income was earned by the assessee in the relevant assessment year therefore there will be no disallowance under section 14A. Hon’ble Delhi High Court in the case of PCIT v/s Era Infrastructure (India) Ltd. dated 20.07.2022 has held that the amendment in Section 14A brought by Finance Act 2022 would be applicable w.e.f., 01.04.2022 (i.e. from AY 2022-23).
8.2 However, after the amendment to Section 14A by the Finance Act, 2022, effective from AY 2022-23, disallowance under Section 14A read with Rüle 8D is applicable even if no exempt income is earned in the current year. This Explanation clarifies, for the removal of doubts, that the provisions of Section 14A shall apply even in cases where no exempt income has accrued, arisen, or been received during the previous year, but expenditure has been incurred in relation to such income. The intent of this amendment, as outlined in the Memorandum to the Finance Bill, 2022, is to address situations where taxpayers hold investments capable of generating exempt income, but no such income is earned in a particular year. The amendment ensures that expenditure incurred on maintaining such investments is not deductible, preventing the erosion of the tax base. Though the appellant has demonstrated through submissions that no exempt income was generated in the current year, however, it cannot be ruled out entirely. It is also noteworthy that while dividends are generally taxable post-Finance Act, 2020, the presence of deductions like Section 80P effectively renders certain income non-taxable, warranting application of Section 14A.
8.3 All case laws relied upon by the appellant pertain to earlier years, and after the insertion of the Explanation, there is no jurisprudence available supporting the appellant’s position for AY 2023-24 onwards. Accordingly, following the AO’s order and the amended provisions, the disallowance of Rs.6,28,000/- is confirmed. Ground Nos. 1 to 4 are dismissed.”
(emphasis supplied by us)
5.1 The above findings of the Ld. CIT(A) have been considered very carefully but not found to be acceptable. The Ld. CIT(A) held that disallowance u/s 14A of the Act r.w. Rule 8D of the IT Rules 1962 has to be made even if no exempt income is earned in the current year but in arriving at the findings, the Ld. CIT(A) did not appreciate the underlying principle that disallowance u/s 14A of the Act r.w. Rule 8D of the I.T. Rules, 1962 will be permissible only if the nature of such income would be exempt and not taxable. The fundamental condition for invoking Section 14A is that the expenditure sought to be disallowed must be incurred in relation to income which does not form part of the total income under the Act. In other words, the applicability of Section 14A is contingent upon the existence of exempt income. Pursuant to the amendment to Section 10(34) by the Finance Act, 2020, effective from AY 2021–22, dividend income is taxable in the hands of the recipient and hence dividend income is no longer exempt in the hands of the shareholder. Thus, in the present case, the assessee even though did not earn dividend income, yet even if it was earned, it would not have been in the nature of exempt income. Therefore, the very foundation for invoking Section 14A is absent in the present case. In view of the above discussion, the submission of the assessee that no disallowance can be made u/s 14A of the Act is acceptable. Thus, the disallowance of Rs. 6,28,000/- made by the AO and confirmed by the Ld. CIT(A) is not sustainable and the same is deleted.
6. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 30.03.2026.
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