DCIT Vs Panacea Biotech Limited (ITAT Delhi)
₹24,000 Exempt Income, ₹3.38 Crore Disallowance: ITAT Rejects Revenue’s Section 14A Arithmetic
A Large Disallowance Against a Small Exempt Receipt
Can an investment-based computation under Rule 8D produce a disallowance of ₹3.38 crore when the exempt income earned during the year is only ₹24,000?
In the case of Panacea Biotech Limited, the Delhi Tribunal answered this question in the assessee’s favour for Assessment Year 2018-19. It upheld deletion of the additional disallowance, observing that the assessee had already voluntarily disallowed an amount equal to its exempt income.
The Tribunal also rejected the Revenue’s attempt to apply the Finance Act, 2022 amendment retrospectively, following the binding decision of the Delhi High Court.
Scrutiny of Investments and Interest Expenditure
The assessee filed its return on 30 November 2018, declaring a loss of ₹113,43,75,129 under the normal provisions and nil book profits.
The return was selected for complete scrutiny through CASS on several issues, including investments, loans, business loss and expenditure relating to exempt income.
During assessment, the Assessing Officer sought details of substantial equity and other investments reflected in the balance sheet. The assessee furnished an investment chart and stated that no new investments had been made during the year.
The Assessing Officer noted that the investments aggregated to approximately ₹344.88 crore as at 31 March 2018. He also referred to substantial borrowings and interest expenditure, observing that the assessee had not furnished a bifurcation of interest attributable to taxable and exempt income.
Rule 8D Produces a ₹3.38 Crore Addition
The Assessing Officer invoked Rule 8D(2)(ii) and calculated a disallowance at 1% of the annual average investment amount of ₹338,56,49,080.
This resulted in a disallowance of ₹3,38,56,490 under section 14A.
The assessment order, passed on 30 September 2021 under section 143(3) read with section 144B, also included a separate addition relating to duty drawback. However, the Revenue’s appeal before the Tribunal concerned only the section 14A disallowance.
The distinction is relevant because the Tribunal’s decision does not adjudicate the duty drawback issue.
CIT(A) Applies the Exempt-Income Ceiling
The CIT(A), by order dated 28 October 2025, deleted the disputed section 14A disallowance.
The first appellate authority relied on the Delhi High Court’s decision in Joint Investments Pvt. Ltd. v. CIT, ITA No. 117/2015, dated 25 February 2015, for the proposition that the disallowance could not exceed the exempt income earned during the year.
The Revenue challenged this relief. Its grounds asserted that the Assessing Officer had correctly invoked Rule 8D after recording satisfaction and that the computation should therefore be sustained.
The Revenue’s appeal was filed with a delay of 11 days, which the Tribunal condoned after accepting that sufficient cause existed.
Revenue Relies on the Finance Act, 2022 Amendment
Before the Tribunal, the Department argued that the amendment introduced by the Finance Act, 2022 permitted disallowance under section 14A even where no exempt income was earned.
It further contended that the amendment applied retrospectively, and requested restoration of the Assessing Officer’s disallowance.
The assessee opposed this argument. It pointed out that its exempt income for the relevant year was ₹24,000 only, relied on decisions restricting disallowance to exempt income, and contended that the 2022 amendment operated prospectively.
The assessee also referred to a favourable decision in its own case for Assessment Year 2020-21 on an identical issue.
₹24,000 Already Disallowed: Nothing Further Survives
The Tribunal recorded two decisive and undisputed facts: the assessee had earned exempt income of ₹24,000, and it had already made a suo motu disallowance of ₹24,000 under section 14A.
The Revenue did not controvert these facts.
The Tribunal held that the disallowance under section 14A read with Rule 8D could not exceed the exempt income for the year under consideration. Since the assessee’s voluntary disallowance already equalled that income, no further disallowance was required.
Accordingly, the investment-based calculation did not justify the additional ₹3.38 crore disallowance.
Amendment Cannot Be Carried Back to AY 2018-19
On retrospectivity, the Tribunal relied on Pr. CIT v. Era Infrastructure India Ltd., 288 Taxman 384.
It noted that the Delhi High Court, after considering the Memorandum explaining the Finance Bill, 2022, had held that the amendment took effect from 1 April 2022 and applied from Assessment Year 2022-23 onwards.
Consequently, the amendment had no application to Assessment Year 2018-19.
Following the jurisdictional High Court’s binding precedent, the Tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal.
Author’s Comments
The decision demonstrates that a Rule 8D calculation must remain subject to the legal limits applicable to the assessment year. Large investments and substantial interest expenditure did not, by themselves, sustain a disallowance exceeding the exempt income in this case.
Equally significant is the treatment of the amendment. The Revenue’s description of it as retrospective could not overcome the jurisdictional High Court’s ruling on its effective date.
The relief also rests on a clear factual foundation: the assessee had already disallowed the entire ₹24,000 exempt income. The Tribunal therefore deleted the additional disallowance; it did not erase the assessee’s voluntary adjustment.
The ruling concerns AY 2018-19 and should be read within that temporal setting when considering its application to later years.
Cases Discussed
- Pr. CIT v. Era Infrastructure India Ltd., 288 Taxman 384 (Delhi High Court) — Followed. The jurisdictional High Court held that the amendment to section 14A introduced by the Finance Act, 2022 applies prospectively from AY 2022-23 and cannot be presumed to operate retrospectively.
- Joint Investments Pvt. Ltd. v. CIT, ITA No. 117/2015, dated 25.02.2015 (Delhi High Court) — Relied upon by CIT(A). The first appellate authority applied the principle that disallowance under section 14A cannot exceed exempt income earned during the relevant year.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is filed by the Revenue challenging the order of the Ld. Commissioner of Income Tax (Appeals) [‘the Ld. CIT(A)’, for short] passed u/s 250 of the Income Tax Act, 1961 (‘the Act’, for short) relevant to Assessment Year 2018-19.
2. The Revenue has raised the following grounds of appeal:-
“1. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Rs.3,38,56,490/- made under Section 14A of the Act read with Rule 8D, without considering that the Assessing Officer had correctly invoked the computation mechanism.
2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in relying on the decision of the Hon’ble Delhi High Court in Joint Investments Pvt. Ltd. Vs CIT, as the principle that disallowance cannot exceed the exempt income earned during the year is contrary to the clarification provided by the Finance Act, 2022, which confirms that disallowance under Section 14A is attracted even if no exempt income is earned in the relevant assessment year.
3. That on the facts and in the circumstances of the case, The Ld. CIT(A) failed to appreciate that the Assessing Officer had correctly applied the method prescribed under Rule 8D after recording due satisfaction.
4. That the order of the Ld. CIT(A) is perverse, erroneous and is not tenable on facts and in law.
5. That the grounds of appeal are without prejudice to each other.
6. That the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of appeal.”
3. It is observed that the appeal of the Revenue was filed belatedly with a delay of 11 days for which a petition was filed for the condonation of the delay. On perusal of the same, we deem it fit to condone the delay as there being ‘sufficient cause’ for the delay. Delay is condoned.
4. Brief facts are that the assessee filed its return of income for the year under consideration dated 30.11.2018 declaring the total loss at Rs.113,43,75,129/- under the normal provisions of the Act and book profits at Rs. Nil. The assessee’s case was selected for complete scrutiny through CASS on the following issues:-
i. Investments/Advances/Loans
ii. Duty Drawback
iii. Business Loss
iv. Unsecured Loans
v. Expenses Incurred for Earning Exempt Income
vi. Disallowance u/s 40A(7) (Gratuity provision)
vii. Deduction on Account of Donation for Scientific Research
5. Notices u/ss 143(2) and 142(1) of the Act were issued and served upon the assessee. After duly considering the assessee’s submissions, the Ld. AO passed the assessment order u/s 143(3) r.w.s. 144B of the Act dated 30.09.2021 determining the total income/loss at Rs.107,86,10,641/-, after making an addition of Rs.2,19,07,998/- towards duty drawback and disallowance of Rs.3,38,56,490/- u/s 14A of the Act. Aggrieved, the assessee was in appeal before the first appellate authority, who, vide order dated 28.10.2025, allowed the appeal filed by the assessee against which the Revenue is in appeal before us on the issue of disallowance u/s 14A of the Act r.w.r 8D of the IT Rules, 1962 (‘the Rules’, for short).
6. We have heard the rival submissions and perused the material available on record. The solitary issue that requires adjudication in the present appeal is pertaining to the disallowance of expenditure related to the exempt income u/s 14A of the Act r.w.r. 8D of the Rules. It is observed that during the assessment proceedings, the Ld. AO has sought for details pertaining to the substantial investment made by the assessee in equity and other investments which were reflecting in the balance sheet whereas the total income as per the ITR was alleged to be low when compared to the investment made by the assessee. The assessee on the query raised by the AO is said to have furnished only the chart containing the investments stating that no new investments were made during the year under consideration and had also not furnished the details of expenditure incurred directly for earning the exempt income. The assessee has claimed total interest payment of Rs.99,11,74,876/- under the head ‘Interest expenditure incurred’ without bifurcating interest expenses incurred for earning taxable income and exempt income as the total corresponding investment aggregated to Rs.344,87,69,586/- as on 31.03.2018. The Ld. AO further observed that the assessee has a borrowing of Rs.5707.08 million and had claimed an interest outflow of Rs.1032.28 million and since the assessee has claimed that no expenditure has been incurred for the purpose of earning exempt income, no disallowance was made. The Ld. AO invoked the provisions of Rule 8D(2)(ii) of the Rules and made a disallowance of 1% of the annual average of the total investment of Rs.338,56,49,080/- and made a total disallowance of Rs.3,38,56,490/-. The Ld. CIT(A) deleted the impugned disallowance on the ground that the disallowance u/s 14A cannot exceed the exempt income earned during the year under consideration and placed reliance on the decision of the jurisdictional High Court in the case of Joint Investment Pvt. Ltd. Vs. CIT, ITA 117/2015 dated 25.02.2015.
7. The ld. DR for the Revenue contended that even in case where there is no exempt income, disallowance u/s 14A can be made as per the amendment brought about by the Finance Act, 2022. The Ld. DR further contended that the said amendment is applicable retrospectively and prayed that the order of the Ld. AO be upheld and the order of the Ld.CIT(A) be set aside.
8. The ld. AR for the assessee, on the other hand, controverted the said fact and stated that the exempt income for the year under consideration was Rs.24,000/- only and, hence, relied on a catena of decisions which reiterated that the disallowance cannot exceed the exempt income. The Ld. AR also relied on various decisions to controvert the fact that the amendment brought about to the said provisions is applicable only prospectively. The Ld. AR also relied on the assessee’s own case for AY 2020-21 on identical issues where the said issue was decided in favour of the assessee.
9. On the above factual matrix of the case, it is an undisputed fact that the assessee’s exempt income as per its return of income was Rs.24,000/- and the assessee is said to have made a suo motu disallowance u/s 14A amounting to Rs.24,000/-. This fact was not controverted by the Revenue. It is a settled proposition of law that the disallowance u/s 14A of the Act r.w.r. 8D of the Rules cannot exceed the exempt income for which we draw support from various decisions relied upon by the Ld. AR. Further, we also draw support from the decision of the Hon’ble jurisdictional High Court in the case of Pr.CIT vs. Era Infrastructure India Ltd., 288 Taxman 384 where the Hon’ble jurisdictional High Court, after noticing the Memorandum explaining the Finance Bill, 2022 has categorically held that the said amendment takes effect from 1st April, 2022 and applies from AY 2022-23 onwards and, therefore, cannot be presumed to operate retrospectively. Accordingly, since the assessment year before us is AY 2018-19, the amendment brought about by the Finance Act, 2022 has no application to the year under consideration. Consequently, following the binding precedent of the Hon’ble jurisdictional High Court, we hold that the disallowance u/s 14A of the Act r.w.r. 8D cannot exceed the exempt income earned by the assessee during the relevant previous year and since the assessee itself has made a suo motu disallowance of Rs.24,000/-, there is no requirement to make further disallowance. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and, hence, deem it fit to dismiss the grounds of appeal raised by the Revenue.
10. In the result, the appeal filed by the Revenue is hereby dismissed.
Order pronounced in the open court on 06.10.2026.
