TaxTMI 
TaxTMI 
2026 (5) TMI 1318
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....ss of the claim made by assessee in relation to the exempt income u/s 14A of the Act read with rule 8D. which is not according to the provisions of the income tax act. 3. That the Authorities below ignored the fact that the Assessee Company does not have any borrowed funds for making investment for earning exempt / tax free income. Thereby, provisions of section 14A shall not be applicable. The addition by the AO and uphold by the CIT(A) be deleted. 4. That the appeal order dated 20.05.2025 is not based on facts of the case, is bad in law against the provisions of law liable to be quashed. 5. That the assessee appellant craves to allow any other relief as may be deemed fit." 2. The facts of the case are, that the assessee filed a return of income on 26.10.2017 disclosing a total income of Rs. 30,74,64,300/-. Subsequently, the case was selected for limited scrutiny to examine expenses debited through P&L account for earning exempt income, as per schedule BP of ITR, which was significantly lower as compared to the investments made to earn exempt income. Accordingly, notices were issued to the assessee company in response to which replies were furnished t....
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....D(2) and added back an amount equal to one half percent of average value of investment in the balance sheet on the first day and last day of the previous year, the income from which did not or would not form part of the total income. Accordingly, a sum of Rs. 9,38,601/- was added back to the income of the assessee and penalty proceedings were initiated under section 270A of the Income Tax Act. 3. Aggrieved with the said assessment order, the assessee filed an appeal with the NFAC, which was subsequently allotted to the Addl/JCIT(A)-1, Visakhapatnam. Before the ld. First Appellate Authority, it was submitted that the assessee company did not incur any direct expenses in making the investments in mutual funds. The indirect expenses relating to investment were claimed on estimate basis and were added to the income as per provisions of section 14A of the Act in the return of income filed by the assessee. Since, the assessee had made very few transactions for investment / redemption of units as compared to the overall transactions made by it, negligible time and resources had been utilized for the purpose. It was further submitted that without appreciating this, the ld. AO had made a....
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....ted that in Rule 8D only came into play when the AO recorded a finding that he was not satisfied with the assessee's method of accounting and the AO would have to show why he was not satisfied with the correctness of the assessee's claim. It was only then that Rule 8D could be invoked. Reference was invited to the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (2018) 402 ITR 640 and the decision of the Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449. Reference was also invited to the Hon'ble Delhi High Court in the case of Pr. CIT vs. Vedanta Ltd. (2019) 102 taxman.com 95 and Eicher Motors Ltd v. Commissioner of Income Tax (2017) 398 ITR 51. The attention of the ld. First Appellate Authority was also invited to the decisions in the case of PCIT vs. U.K. Paints (India) (P.) Ltd. (2017) 392 ITR 552 Delhi; Punjab Tractors Limited vs. CIT (2017) 393 ITR 223 P&H and CIT vs. Taikisha Engineering Limited (2015) 370 ITR 338. References were also invited to other decisions which relied upon the decision of the Hon'ble Delhi High Court in the case of Taikisha Engineering India Limited (supra). ....
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....ction 14A referred to expenditures for which allowances were otherwise provided for. The ld. First Appellate Authority held that it was reasonable to presume that an investment of this nature would require the deployment of the assessee's intellectual, physical and financial resources. He also rejected the contention of the assessee that the AO had not recorded any reason / finding before proceeding to apply Rule 8D, as the AO had clearly specified the reasons in para 7 of the assessment order. He had pointed out that the assessee had common infrastructure and common personnel for earning income under various heads and was using its administrative, managerial and infrastructural setup for taking the crucial decisions relating to investment that yielded exempt income. It was, therefore, inbuilt in the case of the assessee and debited under various heads of the profit and loss account because as per the provisions of section 14A of the Income Tax Act, the term, "expenditure" would take in its ambit not only direct expenditure but also all forms of expenditure regardless of whether they were fixed, variable, direct, indirect, administrative, managerial or financial. In view of the sam....
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....incurred any expenditure in relation to exempt income. Reliance was placed on the decisions of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (TS-5170-SC-2018-O), PCIT vs. Vedanta Limited (TS-7245-HC-2018-Delhi-O), CIT vs. Sociedade De Fomento Industrial (P.) Ltd. (2021) 123 taxman.com 38 (Bom) and Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 SC. It was submitted that the ld. CIT(A) had erred in upholding the disallowance of Rs. 9,38,601/- made by the AO without recording the reasons of his dissatisfaction regarding the correctness of the claim made by the assessee as there were no findings in the assessment order that the accounts maintained were not correct and did not reflect the true state of affairs and furthermore as the expression, "expenditure incurred" in section 14A referred to actual expenditure and not some imagined expenditure. Therefore, section 14A could not be invoked. Furthermore, it was argued that the assessee company did not have any borrowed funds for making investments for earning exempt / tax free income. There were no loans or advances taken by the company and the company had after tax profit of Rs. 21,11,02,....
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....ated the expenditure relatable in investments and no employee of the company engaged in activities relating to investment in mutual funds. The Director, looking after finance, takes decision to invest on spare funds in a particular scheme of mutual fund. Ld. Sr. DR submitted that the ld. AO had recorded his dissatisfaction with the aforesaid explanation on page 4 of the assessment order wherein he had stated that the assessee had common infrastructure and common personnel for earning income under various heads and was therefore, using its administrative, managerial and infrastructural setup for earning income, which did not form part of total income under the Act. The ld. AO had pointed out that the expenditure in relation to income not includable in total income was inbuilt in the case of the assessee and was debited under various heads of the profit and loss account because the manpower of the company was involved in taking the crucial and complicated decisions regarding the investments which had yielded exempt income. The ld. DR submitted that even if the Director had only given advice or concurrence to the mutual fund's agents, the company's utilities had been utilized and sinc....
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....ally asked to substantiate the estimate of expenditure made by the assessee company of Rs. 10/- as disallowable expenditure under section 14A of the Act and the assessee could not submit any basis for estimating the expenditure at Rs. 10/- other than to state that, in fact it incurred no expenditure because it had no personnel devoted to mutual funds and the mutual funds were basically managed by mutual fund agents in coordination with the Director, Finance. Since the number of mutual funds transactions were negligible as compared to the overall transactions of the assessee company, a token amount of Rs. 10/- was estimated. To our mind, this cannot constitute a justification for a particular amount being offered for disallowance. If it were the stand of the assessee that no expenditure whatsoever had been incurred then there was no occasion to offer the token amount of Rs. 10/- for disallowance and if it were the stand of the assessee company that indirect expenditure had been incurred then the disallowance of the indirect expenditure should have taken place on a scientific basis of apportionment, which has clearly not been done. Therefore, we cannot find fault with the decision of....
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....t accept that the argument of the assessee that the entire work was done by mutual fund agents because the mutual fund agents can advise and facilitate with regard to investments and redemption but the actual decision making of what investments to make and what funds to redeem could not be taken by them but by the authorized person in the company. In the instant case, we are talking about investment equivalent to two thirds of the company's annual profits. It is inconceivable that such a major decision could be taken without consultation with the company officials and even within the company. Possibly such huge investments would require clearance by the Board of Directors. Thus, the number of transactions are not an accurate barometer to judge the time and effort taken towards the making of such investment decisions. Even if the attention and effort towards this was comparatively less in terms of the overall responsibilities of that person, in view of the common accounting, it could not be said that no expenditure should be apportioned for the same and therefore, we are in agreement with the ld. AO and the ld. First Appellate Authority on the invocation of Rule 8D for determining t....