Diwakar Viniyog Pvt. Ltd. Vs DCIT (ITAT Kolkata)
Section 14A: Rule 8D Computation Must Include Only Investments That Actually Yielded Dividend
The Controversy
When an assessee holds several investments but earns exempt dividend from only some of them, should the disallowance under section 14A read with Rule 8D be computed on the entire investment portfolio?
The Kolkata Tribunal held that only investments which actually yielded dividend income during the relevant year should be considered. Following the binding decision of the Calcutta High Court in Shalimar Pellet Feeds Ltd., it allowed the assessee’s appeal against the additional disallowance of ₹2.65 crore.
The decision concerns the investment base used in the computation. The assessee had already made a substantial voluntary disallowance; the dispute arose because the Assessing Officer enlarged that base to include investments which had yielded no dividend.
The Facts
The assessee was engaged in the business of investing in equity shares and securities. For AY 2018-19, it filed its return on 11 September 2018, declaring nil taxable income and a business loss.
The case was selected for complete scrutiny through CASS. One of the issues identified for examination was the disallowance under section 14A read with Rule 8D.
The assessee had voluntarily disallowed ₹1,12,32,028. Its computation considered the listed securities from which dividend income had been earned.
It excluded unlisted securities which had not yielded dividend during the relevant year.
The Assessing Officer disagreed and computed the disallowance by considering a wider investment portfolio, resulting in a further disallowance of ₹2,65,36,969.
How the Assessing Officer Computed the Addition
The Assessing Officer considered listed equities of approximately ₹108.58 crore, unlisted equities of approximately ₹264.06 crore, and preference shares of approximately ₹22.45 crore, the latter having been invested in March 2018.
He worked out the annual average of the monthly averages of investments at ₹373,56,81,386.
Applying 1% under Rule 8D(2)(ii), he computed an amount of ₹3,73,56,813. Direct expenditure relating to exempt income of ₹4,12,184 was added, bringing the total disallowance to ₹3,77,68,997.
After reducing the voluntary disallowance of ₹1,12,32,028, the Assessing Officer added the balance of ₹2,65,36,969.
Thus, the central disagreement was whether the computation could include investments from which no dividend had been received.
CIT(A) Upheld Inclusion of the Wider Portfolio
The CIT(A) confirmed the Assessing Officer’s action by relying upon Maxopp Investment Ltd. v. CIT, 402 ITR 640 (SC) and CBDT Circular No. 5/2014 dated 11 February 2014.
The assessee challenged this conclusion before the Tribunal. It maintained that its voluntary computation already covered the securities which had generated dividend income and that non-dividend-yielding investments should not be included merely because they formed part of its portfolio.
In support, it relied upon the Calcutta High Court’s decision in PCIT v. Shalimar Pellet Feeds Ltd., together with several Kolkata Tribunal decisions.
Binding High Court Decision Resolved the Issue
The Tribunal followed PCIT v. Shalimar Pellet Feeds Ltd., (2023) 453 ITR 547 (Cal.), also reported in (2022) 138 taxmann.com 124, decided on 22 February 2022.
In that decision, the Calcutta High Court approved the Tribunal’s direction to compute the Rule 8D disallowance by considering only shares which yielded dividend income during the year.
The High Court expressly recognised that the machinery provision under Rule 8D could be applied only with regard to the dividend-yielding shares for the relevant year. Its discussion also referred to REI Agro Ltd. v. DCIT, (2013) 144 ITD 141 (Kolkata–Trib.) and other decisions adopting that approach.
Respectfully following this jurisdictional authority, the Tribunal allowed the assessee’s grounds.
The Decision
The assessee’s appeal was allowed, granting relief against the further disallowance of ₹2,65,36,969 arising from the inclusion of non-dividend-yielding investments.
The ruling did not eliminate the assessee’s existing voluntary disallowance of ₹1,12,32,028. It addressed the additional amount imposed by enlarging the investment base.
Author’s Comments
The existence of an investment and the receipt of exempt income from that investment are separate facts. Under the principle applied in this decision, the Rule 8D investment base must be identified with reference to the investments which actually generated dividend during the relevant year.
The practical implication is straightforward: the working should be supported by an investment-wise reconciliation of dividend income, showing which holdings yielded dividend and which did not. A calculation based mechanically on the entire investment schedule may produce a substantially inflated disallowance.
The decision also illustrates the importance of applying a precedent to the precise issue. The CIT(A) relied upon Maxopp, but the Tribunal resolved the specific question concerning the investment base by following Shalimar Pellet Feeds, the directly applicable jurisdictional High Court authority.
The listed or unlisted character of the investment is not the decisive principle stated here. Actual dividend yield during the year is the relevant distinction.
Editorial note: The returned-loss figure in the factual narration does not reconcile with the additional disallowance and the assessed loss stated in the order. The figures relating to the disputed section 14A computation, however, reconcile with each other.
Cases Discussed
PCIT v. Shalimar Pellet Feeds Ltd., [2022] 138 taxmann.com 124 (Cal.) / [2022] 287 Taxman 134 (Cal.) / [2023] 453 ITR 547 (Cal.), decided on 22.02.2022 — Followed. The jurisdictional High Court held that the Rule 8D computation should consider only shares yielding dividend income during the relevant year. This was the decisive authority for allowing the assessee’s grounds.
Maxopp Investment Ltd. v. CIT, (2018) 402 ITR 640 (SC) — Relied upon by CIT(A). The first appellate authority cited this Supreme Court judgment while confirming the additional section 14A disallowance.
REI Agro Ltd. v. DCIT, [2013] 35 taxmann.com 404 / (2013) 144 ITD 141 (Kolkata–Trib.) — Considered in the quoted High Court precedent. The judgment in Shalimar Pellet Feeds referred to this decision concerning the dividend-yielding investment base.
Suryamani Financing Company Ltd. v. ITO, ITA No. 1948/Kol/2026 (ITAT Kolkata) — Cited by assessee. Relied upon in support of its section 14A computation; the Tribunal did not separately analyse its ratio.
CHNHB Health Insurance Co. Ltd. v. ACIT, ITA No. 511/Kol/2025 (ITAT Kolkata) — Cited by assessee. Included among the authorities advanced before the Tribunal, without separate judicial discussion.
Nagreeka Foils Ltd. v. DCIT, ITA Nos. 1788, 1930 & 1789/Kol/2024 (ITAT Kolkata) — Cited by assessee. Referred to in the assessee’s submissions; no independent finding on this authority was recorded.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of the Commissioner of Income Tax (Appeals)-NFAC, Delhi [Ld. ‘CIT(A)’] passed u/s 250 of the Income Tax Act, 1961 [the ‘Act’] for AY 2018-19 dated 23.06.2026.
2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:
“1. (a) For that on the facts and in the circumstances of the case, the Ld. CIT(A) was unjustified in confirming the AO’s action making further disallowance of Rs. 2,65,36,969/- u/s 14A r.w. Rule 8D by applying the machinery computation of Rule 8D(2)(ii) to the average value of the total investments instead of only those investments which actually yielded dividend income during the year.
(b) For that on the facts and in the circumstances of the case, the further disallowance of Rs. 2,65,36,969/-made by the AO u/s 14A r.w. Rule 8D was unjustified both on facts and in law and thus deserves to be deleted.
2. For that on the facts and in the circumstances of the case and in law, the assessee craves leave to submit additional grounds and/or amend or alter the grounds already taken either at the time of hearing of the appeal or before.”
3. Brief facts of the case are that the assessee was engaged in the business of investment in equity shares and securities and for the assessment year under consideration the assessee filed the return of income on 11.09.2018 declaring the total income of ₹NIL reflecting a loss of ₹247,00,03,227/-. The case was selected for complete scrutiny through CASS with specific issue including inter alia disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962, large squared-up loans, high ratio of refund to TDS and large claim of other amounts allowable as deduction in Schedule BP. The Assessing Officer [Ld. ‘AO’] added a sum of ₹2,65,36,969/- and consequently the loss was reduced to ₹22,04,66,258/-. The addition was made on account of disallowance u/s 14A of the Act read with rule 8D of the IT Rules as per the computation under rule 8D(2)(ii) on the listed equities of ₹108,57,66,438/- and on the unlisted equities of ₹264,05,60,751/- and preference shares of ₹22,45,00,750/- invested in the month of March, 2018. The Ld. AO worked out the annual average of the monthly average of investments at ₹373,56,81,386/-, 1% of which was worked out at ₹3,73,56,813/- which was added to the amount of expenditure directly relating to the income which does not form part of the total income at ₹4,12,184/- and the total disallowance was worked out at ₹3,77,68,997/-. Since the assessee had already offered an amount of ₹1,12,32,028/- as disallowance u/s 14A of the Act read with rule 8D of the IT Rules, the remaining amount of ₹2,65,36,969/- was liable to be disallowed and the total loss was computed at ₹22,04,66,258/-. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A) who considered the submission of the assessee and relying upon the decision in the case of Maxopp Investment Ltd. vs. CIT 402 ITR 640 (SC) and CBDT Circular No. 5/2014 dated 11.02.2014 confirmed the addition and dismissed the appeal of the assessee.
4. Aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before the Tribunal.
5. Rival contentions were heard and the submissions made have been examined. The Ld. AR submitted that the assessee had made suo moto disallowance on the listed securities from which dividend was earned and as no dividend was earned from the unlisted securities, therefore, the same were not considered for disallowance u/s 14A of the Act read with rule 8D of the IT Rules. The Ld. AR also relied upon the decision in the cases of (i) PCIT vs. Shalimar Pellet Feeds Ltd. (138 taxmann.com 124) [Cal HC], (ii) Suryamani Financing Company Ltd. vs. ITO (ITA No. 1948/Kol/2026) [ITAT Kol], (iii) CHNHB Health Insurance Co. Ltd. vs ACIT (ITA No 511/Kol/2025) [ITAT Kol] and (iv) Nagreeka Foils Ltd. vs. DCIT (ITA Nos: 1788, 1930 & 1789/Kol/2024) [ITAT Kol].
6. The Ld. DR relied upon the order of the Ld. CIT(A) and requested that the same may be confirmed.
7. We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A). The Hon’ble Calcutta High Court in the case of Principal Commissioner of Income-tax vs. Shalimar Pellet Feeds Ltd. [2022] 138 taxmann.com 124 (Calcutta)/[2022] 287 Taxman 134 (Calcutta)/[2023] 453 ITR 547 (Calcutta)[22-02-2022] have held as under:
“11. The next substantial question of law is with regard to the disallowance under section 14A of the Act. The tribunal after noting several decisions has directed the assessing officer to compute the disallowance as per Rule 8D by taking into consideration only those shares which have yielded dividend income in the year under consideration. Though the Tribunal has noted the decision of the Tribunal in REI Agro Ltd. v. Dy. CIT [2013] 35 taxmann.com 404/144 ITD 141 (Kol. – Trib.), there are several other decisions on the said point and the machinery provision under rule 8D can be applied only with regard to the shares which yielded dividend income in the year under consideration. Therefore, we find that the tribunal rightly applied the legal principle and granted relief. Accordingly, the substantial question of law framed on the said issue, namely, the deduction under section 14A of the Act is decided against the revenue.”
8. Thus, respectfully following the decision of the Hon’ble Calcutta High Court in the case of Shalimar Pellet Feeds Ltd. (supra), the grounds of appeal raised by the assessee are allowed.
9. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 7th October, 2026.
