Case Law Details
Kirloskar Pneumatic Company Limited Vs DCIT (ITAT Pune)
Section 14A Disallowance Partly Set Aside; Mutual Fund Investments to Be Excluded from Rule 8D Computation
The Pune Bench of the Income Tax Appellate Tribunal (ITAT) adjudicated the assessee’s appeal for AY 2020-21 challenging a disallowance of ₹47.08 lakh under section 14A confirmed by the NFAC.
The assessee, a listed manufacturing company, had earned exempt income of ₹3.78 crore and had suo motu disallowed ₹2.58 lakh towards expenditure relating to such income. The Assessing Officer, after recording dissatisfaction with the assessee’s working, invoked Rule 8D and computed disallowance at 1% of annual average of monthly average investments, resulting in an additional disallowance of ₹47.08 lakh.
On appeal, the Tribunal held that the Assessing Officer had duly recorded satisfaction as required under section 14A(2), in line with the Supreme Court ruling in Maxopp Investment Ltd., and therefore invocation of Rule 8D was legally valid.
However, on the quantum of disallowance, the ITAT accepted the assessee’s contention that a substantial portion of exempt income arose from mutual fund investments, which are professionally managed, and for which portfolio management fees are already embedded. The Tribunal observed that no further substantial administrative effort is required from the assessee for such investments.
Since the exact bifurcation between mutual fund investments and other investments (such as equity shares) was not examined by the Assessing Officer, the ITAT set aside the matter to the AO with a specific direction to:
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Exclude investments in mutual funds while computing disallowance under Rule 8D, and
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Recompute the disallowance at 1% of the annual average of monthly average of the remaining investments yielding exempt income.
The Assessing Officer was directed to carry out the exercise after granting reasonable opportunity of hearing to the assessee.
Accordingly, the appeal was partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT PUNE
The captioned appeal at the instance of assessee pertaining to A.Y. 2020-21 is directed against the order dated 19.05.2025 framed by National Faceless Appeal Centre, Delhi arising out of Assessment Order dated 23.09.2022 passed u/s.143(3) r.w.s. 144B of the Income Tax Act, 1961.
2. The sole grievance of the assessee is against the finding of ld.CIT(A) confirming the disallowance u/s.14A of the Act at Rs.47,08,705/-.
3. Brief facts of the case are that the assessee is a Limited Company engaged in the business of manufacturing of compression systems, transmission products etc. Return of income for A.Y. 2020-21 e-filed on 05.12.2020 declaring income of Rs.61,02,60,260/-. Case selected for scrutiny under CASS and valid notices u/s.143(2) and 142(1) of the Act were duly served upon the assessee. So far as the issue on hand is concerned, ld. Assessing Officer observed that the assessee has claimed exempt income of Rs.3,78,18,307/- and suo moto disallowed Rs.2,58,000/- u/s.14A of the Act towards expenditure incurred for earning exempt income. Ld. AO observed that the annual average of monthly average of investment yielding exempt income is Rs.49,66,70,482/- and as per Rule 8D of the Income Tax Rules 1962, 1% of annual average of monthly average is Rs.49,66,705/-. Ld. AO also considered the contentions of the assessee explaining the correctness of suo moto disallowance made in the income tax return. Ld. AO made certain observations regarding handling of the portfolios, company’s manufacturing, expert advice, consultancy and meetings and concluded that the assessee has not offered the correct amount of expenditure incurred for earning exempt income. Ld. AO accordingly applied Rule 8D of the Income Tax Rules and made disallowance of Rs.49,66,705/- after giving the benefit of disallowance offered by the assessee at Rs.2,58,000/-. Remaining amount of Rs.47,08,705/- stands added in the hands of assessee. Along with other additions, income assessed at Rs.62,30,73,204/-.
4. Aggrieved assessee preferred appeal before ld.CIT(A) but failed to succeed. Now the assessee is in appeal before this Tribunal solely against the disallowance made u/s.14A at Rs.47,08,705/-.
5. Ld. Counsel for the assessee submitted that ld. AO has not recorded proper satisfaction as mandated u/s.14A of the Act. He also submitted that the average amount of investments yielding exempt income are towards the investments made in Mutual Funds which are managed by the experts and professionals in the field and nominal amount of fees is also charged by the Mutual Fund Companies and therefore no separate funds are needed from the assessee company’s employees to look after the investment. Ld. AO has not made proper satisfaction prior to making disallowance. Reliance placed on the decision of Coordinate Bench, Mumbai in the case of HDFC Bank Ltd. Vs. ACIT (2025) 171 taxmann.com 47.
6. On the other hand, ld. Departmental Representative vehemently argued supporting the order of ld.CIT(A).
7. We have heard the rival submissions and perused the record placed before us. Assessee is aggrieved with the disallowance u/s.14A of the Act at Rs.47,08,705/-. We note that the assessee has earned exempt income of Rs.3,78,18,307/- and having an annual average of the monthly average of investments at Rs.49,66,70,482/- has only stated to have incurred expenditure of Rs.2,58,000/- for earning the exempt income and the same has been disallowed in the computation of income u/s.14A of the Act. Ld. AO however has applied Rule 8D of the Income Tax Rules and calculated the disallowance @1% of the annual average of monthly average of investments.
8. The main contention of the ld. Counsel for the assessee is that ld. AO has not recorded proper satisfaction and for this proposition he referred to the judgment of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT (2018 91 taxmann.com 152. We note that Hon’ble Apex Court in the said judgment has laid down the following ratio :
“41. Having regard to the language of section 14A(2) of the Act, read with rule 8D 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 its 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.”
9. From perusal of the above judgment, we note that Hon’ble Court has held that ld. AO prior to applying Rule 8D of the Income Tax Rules need to record satisfaction that having regard to the kind of the assessee and that the suo moto disallowance u/s.14A is not correct. On examining the facts of the instant case, we observe that ld. AO firstly in para 3.3.8 of the assessment order has referred to the calculation of annual average of monthly average of investments. Thereafter, he moved on to examine the disallowance of Rs.2,58,000/- offered by the assessee. Ld. AO has subsequently dealt with this aspect and the observation of the ld. AO towards recording of satisfaction prior to applying Rule 8D reads as under :
“From the above Rule 8D(i)(ii) w.r.t calculation of expenditure in relation to exempt income, it is concluded that the working of disallowance u/s 14A of IT Act, 1961 is Rs.49,66,705/-. The assessee’s contention of disallowing of expenses with respect to salary payments to employees working on investment work incurred only for earning exempt income cannot be considered because the assessee has invested in short term investment. The handling of fund portfolio during the year involves continuous monitoring, expert advice, consultancy and regular follow up including meetings and hence repeated expenditure. The expenses would not be only staff salary. Further, assessee did not furnish any explanation as to why other expenses should not be considered. Further while non current investments in equity shares amount to Rs.31.337 crores, the current investments made during the year amounts to Rs.106.387 crores in mutual funds. In the absence of a satisfactory claim made by the assessee, The calculation of expenses incurred for earning exempt income is Rs.49,66705/- made at 1% of yearly average of monthly average of investment yielding exempt income during the year as provided for under Rule 8D. Since the assessee has already offered disallowance u/s 14A of Rs.2,58,000/-, the balance amount of Rs.47,08,705/- (Rs.49,66705- Rs.2,58,000/-) is disallowed and added back to total income for computation of tax.
(Addition u/s 14A: 47,08,705/-).”
10. On going through the above observation of ld. AO, we are satisfied that ld. AO has examined the calculations of disallowance made by the assessee and further has examined the records and has observed that considering the nature of investments, time required along with expert advice and various meetings which are to be consistently held around the year for managing such huge amount of investments, assessee has not offered the correct amount of disallowance. Now once we are satisfied that the AO has recorded proper satisfaction prior to making alleged disallowance, next point to be dealt is the quantum of disallowance.
11. We observe that during the course of appellate proceedings before ld.CIT(A) assessee has filed the written submissions appearing at page 84 of the impugned order wherein it has also been stated that majority of the dividend income are from Mutual Funds which are managed by experts and professionals and the company does not have to make any extra efforts or incurred expenses towards earning the exempt income. We find merit in the submissions to the extent that for the investments made in the Mutual Funds made a certain amount of fees is also charged by the Mutual Fund Companies for looking after the portfolio of the investor and certainly not much efforts are needed from the side of assessee. However, the detail of investments made in the Mutual Funds is not discernible from records. At the time of hearing before us, assessee was asked to furnish the bifurcation providing the investments made in the Mutual Funds and other investments fetching exempt income which were filed on 11.02.2025. We therefore deem it appropriate to restore the issue to the file of ld. Jurisdictional Assessing Officer before whom assessee shall furnish all the details of investments in Mutual Funds and Equity Shares filed before us and ld. JAO is directed to verify these details and apply the method provided under Rule 8D of the Income Tax Rules, 1962, i.e. 1% of the annual average of monthly average of investments after excluding the investments made in Mutual Funds. Needless to mention that ld. JAO shall afford reasonable opportunity of hearing to the assessee in such set aside proceedings. Impugned order is set aside and the grounds of appeal raised by the assessee are partly allowed for statistical purposes.
12. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced on this 06th day of January, 2026.
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