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Judgment
PER MANISH AGARWAL, A.M.:
The present appeal is filed by Revenue against the order dated 16.10.2025 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-2/10237/2017-18 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 26.12.2017 passed u/s 14(3) of the Act pertaining to Assessment Year 2015-16.
Brief facts of the case are that assessee company has filed its return of income on 30.09.2015, declaring total income of INR 4,07,34,800/-. The case was selected for scrutiny under CASS. The AO observed that the assessee has incurred interest expenditure and also having large administrative expenses and earned dividend income claimed as exempt income u/s 10(34) of the Act of INR 1,09,82,50,000/- however, made no disallowance u/s 14A of the Act. Therefore, AO by following the Circular No. 5/2014 dated 11.02.2014 invoked the provision of section 14A of the Act and computed the disallowance as per Rule 8D of the Income Tax Rules, 1962 (“the Rules”) which comes to INR 5,91,46,000/-. Besides this, addition of INR 7,28,439/-was made on account of interest of income tax refund. Accordingly, total income of the assessee company was assessed at INR 10,06,09,240/- in terms of the order passed u/s 143(3) of the Act dated 26.12.2017.
Aggrieved by the said order, the assessee preferred an appeal before the ld. CIT(A) who vide impugned order dated 23.12.2025, had deleted the disallowance made u/s 14A of the Act and further, deleted the addition on account of interest on income tax refund.
Aggrieved by the order of ld. CIT(A), the Revenue is in appeal before the Tribunal by taking various Grounds of appeal mentioned in the appeal memo wherein total three (03) Grounds of appeal were taken. Since in all three Grounds of appeal Revenue has challenged the action of first appellate authority of deleting the disallowance made u/.s 14A of the Act which all grounds are inter-linked and inter-connected therefore, they are taken together for consideration.
Before us, ld. Sr. DR for the Revenue vehemently supported the order of the AO and submits that assessee has received exempt income in the shape of dividend of INR 1,09,82,50,000/- which was claimed exempt u/s 10(34) of the Act. Ld. Sr. further submits that the assessee has claimed interest of more than INR 553.11 Lakhs in the Profit & Loss account and further claimed administrative expenses of INR 285.13 Lakhs however, has not made any disallowance u/s 14A of the Act. Ld. Sr. DR submits that the assessee has borrowed funds on which interest was paid which fact was ignored by the ld. CIT(A) who has deleted the addition by observing that the investments were made out of interest free funds which is factually incorrect. As per ld. Sr. DR, the assessee has paid the interest on the funds borrowed and had the funds were not utilized in making investments yielding exempt income, there was no need to borrow the funds thus the disallowance u/s 14A should have been made and thus requested that the order of AO be uphold. He prayed accordingly.
On the other hand, ld.AR for the assessee vehemently supported the order of ld. CIT(A) and submits that the assessee was engaged in the business of investments and money lending activities. Ld. AR further drew our attention to para (v) at page 11 to 15 of the order wherein the ld. CIT(A) has reproduced the table submitted by the assessee, containing the details each investments made and claimed that none of the investment made in sister companies was out of the borrowed funds, if any. Ld. AR thus submits that the investment on which the exempt income was earned, were made out of its own capital, Reserves and surpluses and no borrowed funds were involved. He further submits that in assessee’s own case for AY 2014-15, issue of disallowance u/s 14A was raised which was settled by Tribunal in ITA No.4018/Del/2018 vide order dated 24.09.2021 and the relevant observations are reproduced at pages 16-18 of the appellate order. Ld. AR thus, submits that the ld. CIT(A) after appreciating the fact that no borrowed funds were invested in dividend yielding investments and further by placing reliance on the judgment of Co-ordinate Bench in assessee’s own case for preceding assessment year, has deleted the disallowance made and thus, requested for the confirmation of the order of ld. CIT(A). Reliance is also placed on the judgement of coordinate bench of Bangalore Tribunal in the case of Manipal Education & Medical Group India Pvt. Ltd. Vs. ACIT reported in (2025) 181 Taxmann.com 711 (Bangalore Trib.) where the coordinate bench has held where no satisfaction was recorded about the correctness of claim of assessee that it had not incurred any expenditure for earning exempt income, no disallowance could be made u/s 14A of the Act. He prayed accordingly.
Heard the contentions of both the parties at length and perused the material available on record including the orders of the lower authorities, submissions made and the evidences produced. In the instant case, the AO had made the disallowance u/s 14A however, it is observed that in the assessment order, no satisfaction was recorded with respect as provided in section 14A of the Act giving the finding that the borrowed funds were involved in making investments having exempt income. It is further observed that the AO has made the disallowance out of the interest payment by invoking 2nd limb of Rule 8D of the Rules of INR 410.99 Lakhs and further of INR 180.47 Lakhs as per 3rd limb of 0.5% of the value of average value of investment. While doing so, the AO has failed to appreciate the fact that all the investments having exempt income were made in the years where assessee was not having any borrowed funds or borrowed funds available but the opening capital and reserves were more than sufficient to cover up the investments made. This fact is successfully demonstrated by the assessee by way of chart reproduced at pages 11-15 of the appellate order which was appreciated by ld. CIT(A) and deleted the addition made by the AO.
It is further observed that in the immediately preceding assessment year, under identical circumstances, the Co-ordinate Bench in assessee’s own case, has deleted the disallowance made u/s 14A of the Act. Since there is no change in the circumstances, thus, by respectfully following the judgements of Co-ordinate Bench in assessee’s own case for AY 2014-15 and also of the Bangalore bench as stated supra, we are of the view that ld. CIT(A) has rightly deleted the disallowance which order is hereby, upheld. Accordingly, all the grounds of appeal raised by the revenue are dismissed.
In the result, appeal of the Revenue is dismissed.