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Judgment
ORDER
PER RAMIT KOCHAR, AM:
This appeal in ITA No. 235/Del/2026 for Assessment Year: 2018-19 has arisen form the learned CIT(A)’s appellate order u/s 250 of the Income-tax Act, 1961(in short “1961 Act”) dated 16.10.2025 in DIN & Order No: ITBA/NFAC/S/250/2025-26/1081821546(1), which in turn has arisen from the assessment order dated 08.03.2021 passed by the AO u/s 143(3) read with sections 143(3A) & 143(3B) of the 1961 Act(DIN: ITBA/AST/S/143(3)/2020-21/1031306477(1)) .
The Grounds of Appeal raised by the assessee in the Memo of appeal filed with the Income Tax Appellate Tribunal, New Delhi, reads as under :-
“1.1. Whether on the facts and circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of Rs. 18,29,50,905/- made u/s 14A r.w. rule 8D without appreciating that the assessee has earned exempt income during the year and accordingly provisions of 14A r.w. rule 8D are duly applicable.
2.Whether on the facts and circumstances of the ease and in law, the CIT(A) erred in not appreciating that no income including exempt income can be earned without incurring expenditure and hence the AO had rightly made disallowance of Rs. 18,29,50,905/-under the provision of Section 14A r.w. rule 8D.
3.Whether on the facts and circumstances of the case and in law, the CIT(A) erred in not appreciating that the provisions of Section 14A r.w. Rule 8D are squarely applicable to the facts of the case as the assessee had made huge investments in the forms/modes which yield exempt income.
4.The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.
Brief facts of the case are that the case of the assessee was selected by Revenue for complete scrutiny assessment , for the following reasons:
S. No. Issues
Refund Claim
ii Ind-AS Compliance and Adjustment
Foreign Financial Interest
Expenses Incurred for Earning Exempt Income
The assessee had filed return of income for the impugned assessment year, declaring income of Rs. 6,83,38,250/-. During the course of assessment proceedings, the AO issued to the assessee statutory notices u/s 143(2) and 142(1) of the 1961 Act. The details of notices are recorded in the assessment proceedings. The assessee participated in the assessment proceedings . The AO finally issued Show Cause Notice(SCN), dated 04.02.2021 to the assessee , which is reproduced hereunder:-
“In the ITR no expenses disallowances have been made for the exempt income of Rs. 6.3 crores earned during the year. The plea that no such expenditure has been incurred for the purpose of earning exempt income is not acceptable in view of sec 14A r.w.r. 8D which says no deduction shall be allowed in respect to the expenditure incurred by the assesse in relation to Income which does not form part of the total income. In this relation, you have submitted as below: "that all the decisions relating to investments are made at the level of Board of Directors only and no expenditure in that relation has been debited in the profit and loss account. Further, after making the investment also, no day to day activity is required as all the companies in which investments are made are sister concerns of the assessee company. Dividend Income is directly deposited in the company's bank account and therefore, the assessee does not incur any expenditure in relation to earning of the exempt income." However, the argument is not acceptable as the activity of the board of
directors is not just incidental, but one of the main objectives for earning exempt income for the company and hence the expenses do have a direct correlation with the income earned from such investment activity. Eventhough no day to day activity involving employees or mechanical labour is involved, the brainstorming action of the directors and the expenses involved itself in making the investment will qualify as an expenditure u/s 14A.
| any amount of expenditure which is directly relating to exempt income | 313820 |
| amount equal to 1% of annual average of monthly average of opening and closing balances of value of investments, whose income is or shall be exempt {01X{(18856830000+17670587000)/2]} | 182637085 |
| Total disallowance | 182950905 |
The assessee objected to disallowance of expenditure proposed by the AO u/.s 14A of the 1961 Act read with Rule 8D of the Income-tax Rules, 1962. The assessee contended in order to make disallowance u/s 14A of the 1961 Act, there has to be an expenditure which is sought to be disallowed , which is actually been incurred by the assessee for earning an exempt income. It was submitted that no brain storming is required for receiving dividend income from subsidiary company. It was submitted that there is no direct nexus between the expenditure incurred and the earning of dividend income. It was submitted that Rule 8D of Income-tax Rule, 1962 can be applied only when the AO having regards to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income under the provisions of the 1961 Act.
The AO rejected the aforesaid contentions of the assessee , by observing as under:
“4.However, the claim of the assessee cannot be accepted to as the investment made in the subsidiary companies by the assessee is also part of the strategic investment arising out of the brainstorming activities of the board of directors. The board of directors should have been involved in the crucial decisions of the formation of the subsidiary companies and must have deliberated making use of resources of the assesse to arrive at the investment strategy. Thus, the activity of the board of directors is not just incidental, but one of the main objectives for earning exempt income for the company and hence the expenses do have a direct correlation with the income earned from such investment activity. Thus there is a direct nexus between the expenditure incurred and the earning of dividend income and hence there is a valid reason for the AO being not satisfied with the correctness of the claim of the assesse in respect of such expenditure in relation to income which does not form part of total income under this act and is thereby justified in invoking the disallowance u/s. 14A r.w. rule 8D of the Income-tax Act, 1961. 5. After verification of the records, assessment is completed by making a disallowance of Rs. 18,29,50,905/- u/s. 14A r.w. rule 8D of the Income-tax Act, 1961 as discussed in the SCN.
| Return Income | Addition | Assessed income | |
| Business Income | 68,338,247 | 182950905 | 251289152 |
| Capital Gains | |||
| Total income |
Thus, the AO made addition to the tune of Rs.18,29,50,905/- in the hands of the assessee u/s 14A r.w.r. 8D of the 1962 Rules.
Aggrieved, the assessee filed first appeal before the Ld. CIT(A) . The assessee participated in appellate proceedings. The Ld. CIT(A) deleted the additions as were made by the AO, by holding as under:
“DECISION OF THE APPELLATE AUTHORITY W.R.T. GROUNDS NO.-1 TO 4
The contentions of both the Appellant assessee and the Assessing officer resp. have been carefully considered and this Appellate authority has noted the following points:
i.The assessee company for the A.Y. 2018-19 filed its Return of Income on 29.11.2018 returning an income of Rs. 68338250/-, The return filed was selected for scrutiny under CASS.
ii.Notice u/s. 143(2) of the Act was issued to the assessee on 22.09.2019 calling for certain details. Further, Notice/s u/s. 142(1) of the Act were issued to the assessee on 3.12.2020. The assessee furnished the details in response to the notices vide the replies dated 4.10.2019, 17.12.2020 and 4.1.2021. Subsequently a show cause notice (SCN) was issued to the assessee on 4.2.2021.
iii.The appellant had submitted before the AO that, we may submit that present case is covered by the recent judgment pronounced by Jurisdictional Hon'ble ITAT Bench in in the case assessee's own case (ITA No. 4018/Del/2018, Date of Order: 24.09.2021) for the AY 2014-15 wherein Hon'ble ITAT Bench has discussed similar facts and circumstances and passed the order in favour of the assessee by affirming the submissions of the assessee that it has not incurred any expenditure for earning the exempt income (Para 27, page 11 of the order). Copy of order is hereby enclosed as Annexure-A. Since the facts of the case are same, the findings given by the ITAT in assessee's case will squarely apply in the present case. Accordingly, the addition made by the AO deserves to be deleted...".
iv.However, due to the effect of the amendment it is seen that when the AO is not satisfied with the correctness of assessee's claim about the expenditure incurred in relation to earning of exempt income, now no separate addition would be required to be made in respect of interest expenditure and instead of making separate disallowance of interest expenditure the total estimated disallowance of 1% is to be made.
v.The Assessing officer during the course of assessment proceedings sent various notices to the assessee and gave the assessee opportunity to be heard and the assessee provided its replies/submissions.
vi.After considering the submissions of the assessee, the Assessing officer went ahead and made the addition for Rs. 18,29,50,905/- u/s 14A rwr 8D of the Income Tax Act, 1961.
vii.The appellant assessee in its submissions states that, "...On perusal of the above provisions, we may submit that recording non-satisfaction by assessing officer as to correctness of assessee's claim that no expenditure is incurred for earning exempt income is sine qua non for invoking section Rule 8D(2) for estimation of amount of disallowance. We may submit that, the assessee, vide reply dated 04.01.2021, furnished details of entire expenditure along with explanation. The ld. AO has not pointed out as to which expenditure is incurred for the purpose of earning exempt income. In the present case in case the assessing officer has not pointed anything to show that he is not satisfied with correctness of claim of the assessee in respect of expenditure having regard to the accounts of the assessee. Only when he is not satisfied with the correctness of assessee's claim, the provision of estimation under Rule 8D(2) would apply. Therefore, the disallowance is not justified....".
viii.The appellant assessee has also submitted an order of the Hon'ble ITAT in assessee's own case for the AY 2014-15 in which similar issue has been discussed, the copy of order dt. 24.09.2021 (in ITA No.-4018/DEL/2018) is reproduced hereunder:
“22.As mentioned elsewhere, the investments generating exempt dividend income were made in earlier A.Ys and we have the benefit of assessment order dated 14.03.2016 framed u/s 143(3) of the Act for A.Y 2013-14. We find that no disallowances were made by the Assessing Officer in his scrutiny assessment case.
23.We further find that the said assessment order was considered as erroneous and prejudicial to the interest of the revenue by the PCIT who, invoking the provisions of Section 263 of the Act, framed an order dated 30.03.2018. The said order was quashed by this Tribunal vide order dated 29.0 8.2018 in ITA No. 2838/DEL/2018.
24.Considering the facts of the case in totality in light of the financial statements exhibited elsewhere, and in light of the ratio laid down by the Hon'ble Supreme Court in the case of South Indian Bank Ltd [supra], in our considered opinion, there cannot be any disallowance of interest for earning exempt income and there is no reason to interfere with the findings of the ld. CIT(A).
25.In so far as the disallowance on account of administrative expenses is concerned, we find that there is no dispute that all the investments are made in the sister concern in which the assessee has deep business interests and under business expediency, it has invested various amounts in shares of group companies. In our considered opinion, these investments are strategic investments made for furtherance of business of its sister concern.
26.As mentioned elsewhere, apart from the investments in Bajaj Corp Ltd and Bajaj Hindustan, all other investments are unquoted investments and any appreciation in the value of shares at the time of sale would be taxable.
27.We find that the assessee has submitted details of each and every item of expenditure and has specifically pointed out that none of the same is incurred for the purpose of earning exempt income. It was brought to the notice of the Assessing Officer that the directors of the company are also employees of the sister concern, who do not draw any remuneration from the company and take care of entire investment work. No error or infirmity has been pointed out by the Assessing Officer who has simply computed the disallowances as per formula given in Rule 8D. In our considered view, such mechanical approach of the Assessing Officer has no legs to stand on. We, therefore, decline to interfere with the findings of the Id. CITA.
28.In the result, the appeal of the Revenue in ITA No. 4018/DEL/2018 is dismissed.
The order is pronounced in the open court on 24.09.2021.”
ix.The Hon'ble ITAT vide the above said order dt. 24.09.2021 has stated that, the directors of the company are also employees of the sister concern, who do not draw any remuneration from the company and take care of entire investment work. No error or infirmity has been pointed out by the Assessing Officer who has simply computed the disallowances as per formula given in Rule 8D. In our considered view, such mechanical approach of the Assessing Officer has no legs to stand on. We, therefore, decline to interfere with the findings of the Id. CITA.... 28. In the result, the appeal of the Revenue in ITA No. 4018/DEL/2018 is dismissed...".
x.Thus, in view of the above, this Appellate authority is in the view that, as the above mentioned order is in appellant assessee's own case and has similar facts. Thus, this Appellate authority is inclined to rely upon the above mentioned order of the Hon'ble ITAT. Thus, the contentions of the appellant assessee vide ground no.-2 & 3on this issue are found correct and tenable.
In the light of the above discussed facts at point no.-(i) to (x), the submissions of the appellant assessee and the by placing reliance on the order of Hon'ble ITAT dated dt. 24.09.2021 in appellants own case for AY 2014-15 on similar issue, this Appellate authority finds the contentions of the appellant assessee to be correct and the additions made by the Assessing officer for (i) Rs18,29,50,905/- u/s. 14A rwr 8D of the Income Tax Act, 1961 is DELETED. The grounds of appeal no.-2 to 3are thus allowed. The grounds no.-1 and 4 are general in nature and are hence not adjudicated upon further or are automatically remedied.
In the result, this appeal is PARTLY ALLLOWED.”
Still aggrieved, the assessee has filed second appeal with the Tribunal. At the outset, the Ld. Counsel for the assessee submitted that the Tribunal in the preceding year i.e., AY 2017-18 in ITA no. 9112/Del/2025 , vide order dated 29.04.2026 has observed that there is no satisfaction recorded by the AO before invoking Rule 8D of the 1962 Rules, and hence, the addition made by the AO u/s 14A r.w.Rule 8D was deleted. It was submitted that even in the impugned assessment year , the AO has not recorded objective satisfaction before invoking Rule 8D of the 1962 Rules, and thus on this short ground itself the additions made by the AO needs to be deleted. It was submitted that the assessee has investment in various Bajaj Group entities , which are its subsidiaries . It was submitted that assesse has earned exempt income to the tune of Rs.6,35,99,50,625/- , and the AO has made disallowance of expenditure to the tune of Rs.18,29,50,905/- u/s 14A read with Rule 8D of the 1962 Rules, while no expenditure was incurred by the assessee for earning an exempt income. It was submitted that returned income of the assessee was Rs.6,83,38,247/. The ld. Counsel for the assessee submitted that total expenditure incurred by the assessee was to the tune of Rs.221.37 lacs (the assessee has filed unsigned/un-audited chart of expenditure before the Tribunal (placed on record in file)-audited accounts not filed before ITAT) , and it was claimed that none of the expenses were incurred in relation to earning income. The said details are reproduced hereunder:
It was also claimed by ld. Counsel for the assessee that all the decisions relating to investments are made at the level of Board of Directors , and no expenditure in that relation has been debited in the profit and loss account. It was also contended that dividend income is credited/deposited directly in the bank account and the assessee did not incur any expenditure in relation to earning of the exempt income.
It was submitted that the AO made addition to the tune of Rs.18.29 Cr. by invoking section 14A r.w.Rule 8D of the 1962 Rules in a mechanical manner. It was submitted that ld. CIT(A) rightly deleted the aforesaid additions. The ld. Counsel for the assessee also relied upon the order passed by ITAT in assessee’s own case for assessment year 2014-15 in ITA no.4018/Del/2018 , vide orders dated 24.09.2021, wherein the Tribunal deleted the additions as were made u/s 14A read with Rule 8D, wherein the Tribunal observed as under:-
“27.We find that the assessee has submitted details of each and every item of expenditure and has specifically pointed out that none of the same is incurred for the purpose of earning exempt income. It was brought to the notice of the Assessing Officer that the directors of the company are also employees of the sister concern, who do not draw any remuneration from the company and take care of entire investment work. No error or infirmity has been pointed out by the Assessing Officer who has simply computed the disallowances as per formula given in Rule 8D. In our considered view, such mechanical approach of the Assessing Officer has no legs to stand on. We therefore, decline to interfere with the findings of the ld. CITA.”
It was submitted by ld. Counsel for the assessee that there was amendment by way of substitution of Rule 8D(2) wef 02.06.2016 vide the IT(fourteenth amendment ) Rules , 2016 , but still the ratio of decision of order of the Tribunal for assessment year 2014-15 shall squarely apply. The assessee also relied upon the following case laws to support its contentions:
Judgment and order passed by Hon’ble Delhi High Court in the case of Coforge Limited v. ACIT , reported in (2021) 128 taxmann.com 99(Delhi)
Delhi Tribunal order in the case of Indian Renewable Energy Development Agency Limited v. DCIT, reported in (2026) 182 taxmann.com 73(Delhi-Trib.)
Bangalore Tribunal in the case of Manipal Education & Medical Group India Private Limited v. ACIT, reported in (2025) 181 taxmann.com 711(Bang.Trib.)
The assessee has filed written submissions , which are placed on record in file
The Ld. CIT-DR submitted that ld. AO has duly recorded dissatisfaction as to the correctness of the claim of the assessee that no expenditure was incurred while earning exempt income. The assessee has earned substantial exempt income. It was submitted that dissatisfaction recorded by the AO as to claim of the assessee that no expenditure was incurred in relation to earning exempt income having regard of the accounts of the assessee before invoking Rule 8D of the 1962 Rules, is reproduced at page number 2 of the assessment order . The ld. CIT-DR submitted that the AO has rightly invoked Section 14A read with Rule 8D , as the assessee claim of Nil Expenditure in relation to earning of an exempt income is untenable . It was submitted that it is not necessary that expenditure incurred in relation to earning of an exempt income is confined to Direct Expenditure as it covers also indirect expenses. It was submitted that the assessee has substantial investments. The strategic decisions relating to investment and deployment of funds were undertaken at managerial and Board level. Such activities necessarily involve utilization of administrative and managerial resources. The ld. CIT-DR submitted that the AO has examined exempt income earned by the assessee, claim of the assessee that no expenditure was incurred by the assessee and role of managerial and strategic function in maintaining such investments. It was submitted that thereafter the AO recorded dissatisfaction with correctness of the claim of the assessee before invoking Rule 8D. Thus, the AO complied with the mandatory requirement u/s 14A(2) of the 1961 Act. It was submitted that the strategic investment are also covered u/s 14A of the 1961 Act. It was submitted that even strategic investments requires (a) analysis and approval by management (b) continous monitoring and oversight (c) deployment of organizational resources and (d) managerial involvement in investment decisions . It was submitted that it is well settled that dominant purpose of investment is irrelevant for applicability of Section 14A once exempt income has been earned. It was submitted that the Rule 8D was correctly applied by the AO. It was submitted that the AO applied Rule 8D only after rejecting the correctness of the assessee’s claim on objective consideration of facts and accounts. It was submitted that the computation mechanism prescribed under Rule 8D is statutory in nature and becomes mandatory once the AO records dissatisfaction regarding correctness of the claim of the assessee. The ld. CIT-DR submitted that ld. CIT(A) erred in deleting the additions. It was submitted that the earlier Tribunal decision was rendered on distinct facts and financial matrix.It was also submitted that there was amendment in Rule 8D , and the order of the ITAT for assessment year 2014-15 cannot be relied upon as it relates to period prior to amendment in Rule 8D which stood amended wef 02.06.2016. The impugned assessment year is assessment year 2018-19. In the instant case, the assessee has earned substantial exempt income , and consequently Section 14A gets triggered. The dominant purpose for which strategic investments were made in subsidiaries is irrelevant. It was further submitted that during impugned assessment year, the AO has duly recorded dissatisfaction after examining assessee’s contentions. It was submitted that the AO has categorically observed that the activities of Directors are in relation to investment decisions which cannot be treated as incidental, strategic investments decision involve managerial expenditure, there exists direct nexus between investment related activities and exempt dividend income earned by the assessee. Thus, Rule 8D is not invoked in mechanical manner but based upon objective examination of facts and accounts. It was further submitted that the ITAT order for assessment year 2014-15 in assessee’s own case relied upon by the assessee concerned primarily with interest disallowance under Rule 8D(2)(ii), and decision was rendered on the premises that investments were made out of interest free funds and nexus between borrowed funds and exempt investments was not established, but facts in the instant appeal are different also keeping in view amended Rule 8D. It was submitted that the assessee has merely asserted that no expenditure was incurred for earning exempt income, but no credible evidence to that effect is produced by the assessee to demonstrate that no managerial time was devoted towards investment activities , no administrative infrastructure was utilized, no monitoring or supervisory functions were performed and no resources whatsoever was employed in maintaining substantial investments yielding exempt income. It was submitted that once the claim of the assessee that no expenditure was incurred for earning exempt income stood rejected by the AO, Rule 8D will get triggered , and ld. CIT(A) erred in deleting the addition as were made by the AO by way of disallowance of expenditure u/s 14A read with Rule 8D. The ld. CIT-DR has filed written submissions, which are placed on record in file.
We have considered rival contentions and perused the materials available on record. The assessee filed its return of income for the impugned assessment year on 29.11.2018, declaring income of Rs. 6,83,38,250/- . The case of the assessee was selected by Revenue for framing complete scrutiny assessment under CASS , for the following issues:-
S. No. Issues
Refund Claim
ii Ind-AS Compliance and Adjustment
Foreign Financial Interest
Expenses Incurred for Earning Exempt Income
The assessee is an investment/holding company wherein the assessee has made investments , inter-alia, in various subsidiary/associated companies , predominant being Bajaj Hindusthan Limited , Bajaj Consumer Care Limited etc. . The assessee also owns Brands relating to ‘Bajaj Group’. The assessee holds average annual investments based on monthly averages, to the tune of Rs. 1826.37 crores , during the year under consideration. The assessee has earned income to the tune of Rs. 635.99 crores , which was claimed by it to be exempt under the provisions of the 1961 Act, during the year under consideration, which are stated to be mainly in the form of dividends from its investments made in subsidiary/associated companies, and were claimed to be exempt under the provisions of the 1961 Act. The assessee has claimed that it has not incurred any expenditure having regards to its account , in relation to earning of an exempt income . The assessee has chosen not to file audited financial statements before the Tribunal. The assessee has filed an unsigned/unaudited chart of expenditure incurred by it , and it is claimed that only expenditure of Rs. 221.36 lacs were incurred by it . It is claimed that the details of such expenditure with explanations were produced before the AO as well ld.CIT(A). The said chart is reproduced again hereunder:
It is claimed that the AO rejected the contentions of the assessee that no expenditure was incurred by it having regards to its account in relation to earning of an exempt income. The AO invoked provisions of Section 14A read with Rule 8D of the 1962 Rules, and made disallowance of expenditure to the tune of Rs. 18,29,50,905/- , which stood added to the income of the assessee . It is also claimed that ld. CIT(A) has rightly deleted the additions as were made by the AO. It is claimed that no objective satisfaction was recorded by the AO with respect to claim of the assessee that no expenditure was incurred by the assessee , having regards to the accounts of the assessee , in relation to earning of an exempt income. It is claimed that the investments made by the assessee are in subsidiary/associated companies , which are strategic in nature. We have observed that the AO has recorded following dissatisfaction as to correctness of the claim of the assessee that it has not incurred any expenditure in relation to earning of an exempt income, before invoking Rule 8D of the 1962 Rules, which is reproduced hereunder:
“In the ITR no expenses disallowances have been made for the exempt income of Rs. 6.3 crores earned during the year. The plea that no such expenditure has been incurred for the purpose of earning exempt income is not acceptable in view of sec 14A r.w.r. 8D which says no deduction shall be allowed in respect to the expenditure incurred by the assesse in relation to Income which does not form part of the total income. In this relation, you have submitted as below: "that all the decisions relating to investments are made at the level of Board of Directors only and no expenditure in that relation has been debited in the profit and loss account. Further, after making the investment also, no day to day activity is required as all the companies in which investments are made are sister concerns of the assessee company. Dividend Income is directly deposited in the company's bank account and therefore, the assessee does not incur any expenditure in relation to earning of the exempt income."
However, the argument is not acceptable as the activity of the board of directors is not just incidental, but one of the main objectives for earning exempt income for the company and hence the expenses do have a direct correlation with the income earned from such investment activity. Eventhough no day to day activity involving employees or mechanical labour is involved, the brainstorming action of the directors and the expenses involved itself in making the investment will qualify as an expenditure u/s 14A.
| any amount of expenditure which is directly relating to exempt income | 313820 |
| amount equal to 1% of annual average of monthly average of opening and closing balances of value of investments, whose income is or shall be exempt {01X{(18856830000+17670587000)/2]} | 182637085 |
| Total disallowance | 182950905 |
Thus, it is observed that the assessee has made investment in various subsidiary/associated companies which are claimed to be strategic in nature . We have observed that the assessee is holding substantial investments which were to the tune of annual average of monthly averages of the value of investments, to the tune Rs.1826.37 crores . The assessee has earned exempt income to the tune of Rs. 635.99 crores, claimed to be from dividend income from the aforesaid investments, which are claimed to be exempt by the assessee under the provisions of the 1961 Act. We have observed that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com154 (SC) has observed that dominant purpose of investment is irrelevant , and Section 14A shall be applicable even in the case of strategic investments made by the tax-payer , and disallowance of the expenditure incurred in relation to the earning of exempt income has to be made by invoking provisions of Section 14A of the 1961 Act, by holding as under:
“32.In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.
33.There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words 'in relation to' in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not.
34.Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom.
"The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. ** ** **
The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A."
35.The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed. *** ***
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 AO 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 AO 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, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”
Thus, this contention of the assessee that the investments made by it in its subsidiary/associated companies being strategic in nature , and hence Section 14A is not applicable, stand rejected , in view of aforesaid judgment and order of Hon’ble Supreme Court in the case of Maxopp(supra).
Before proceeding further, it will be profitable to refer to Provisions of Section 14A of the 1961 Act as well Rule 8D of the 1962 Rules, as was applicable during the impugned assessment , which read as under:
Expenditure incurred in relation to income not includible in total income.
14A. [(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.]
[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed , if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3)The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]
Method for determining amount of expenditure in relation to income not includible in total income.
8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
[(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.]
It is further the contention of the assessee that no objective dissatisfaction was recorded by the AO , having regard to the accounts of the assessee , as to correctness of the claim of the assessee that no expenditure was incurred by the assessee in relation to earning of exempt income . The assessee has relied upon the decisions of the Hon’ble Tribunal in the assessee’s own case for Assessment Year 2017-18, wherein Tribunal has held as under:
“4.We have heard the learned D.R. and perused the materials available on record. The assessee had filed return of income on 27-11-2017 declaring total income of Rs 5,54,13,490 under normal provisions of the Act and Rs 5,59,12,900 under section 115JB of the Act. In the course of assessment proceedings, it was noticed that assessee had shown dividend income of Rs 76,32,40,625 and exemption under section 10(34) of the Act was claimed for the same. The assessee had not made any disallowance under section 14A of the Act in the return of income. The Learned AO worked out the disallowance by applying the computation mechanism provided in Rule 8D(2) of the Income Tax Rules and disallowed Rs4,72,29,284 in the assessment. The Learned CITA held that the Learned AO had mechanically applied Rule 8D of the Rules without recording objective dissatisfaction as required under Section 14A(2) of the Act and without identifying any expenditure relatable to earning the exempt dividend income. The Learned CITA by placing reliance on the decision of this Tribunal in assessee's own case for assessment year 2014-15 deleted the disallowance. We find that the Tribunal had also placed reliance on the decision of Hon'ble Supreme Court in the case of South Indian Bank in assessment year 2014-15. We agree with the ground raised by the revenue that the decision of South Indian Bank Ltd would not be applicable to the facts of the instant case as the disallowance is only made for indirect expenses and not for interest. Hence availability of own funds is not a relevant consideration at all as no disallowance of interest has been made. However, it is a fact that the Learned AO had not recorded his objective satisfaction as to why the claim made by the assessee that no expenses were incurred for earning exempt income is incorrect. This is the mandate provided in section 14A(2) of the Act. We find that the Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640(SC) had categorically held that the recording of dissatisfaction with cogent reasons is mandatory on the part of the Learned AO before resorting to computation mechanism provided in Rule 8D(2) of the Rules. Hence we hold that the relief granted by the Learned CITA is in order. Accordingly, the ground no, 2 raised by the revenue is dismissed and ground no. 1 raised by the revenue is allowed”
Thus , the Tribunal has deleted the addition for the assessment year 2017-18, on the grounds that no objective dissatisfaction was recorded by the AO before invoking provisions of Section 14A r.w.r. 8D of the 1962 Rules.. We have observed from the judgment and order of Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra) which is relied upon by the Tribunal, wherein the Hon’ble Supreme Court has observed in context of recording of dissatisfaction by the AO, as under:
““32. In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. ***
34.Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom.
"The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. ** ** ** The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A."
35.The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed. *** ***
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 AO 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 AO 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, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”
We have observed in the instant case, the assessee being holding substantial investments in subsidiary /associates concerns as well engaged in the business of ownership of FMCG product brand activities for development of brand earning income from royalties also , the business being indivisible , the theory of apportionment of expenses will apply as approved by Hon’ble Supreme Court in Maxopp(supra). The assessee held substantial investments with average annual investments of monthly averages of value of investments to the tune of Rs. 1829.51 crores in subsidiary/associates companies, the assessee having earned substantial dividend of Rs. 635.99 crores which was claimed by the assessee as an exempt income u/s 10(34) of the 1961 Act. It is observed that as is contended by ld. Counsel for the assessee in written submissions filed that apart from exempt income earned by the assessee , it has also earned royalty income which is chargeable to tax. The assessee having declared taxable income of Rs. 6,83,38,247/- in the return of income filed with Revenue for the impugned assessment year. The assessee has claimed that it has incurred no expenditure in relation to earning of its exempt income. The assessee has filed one chart(unaudited/unsigned) wherein it is claimed that total expenditure incurred were to the tune of Rs. 221.36 lacs which is stated to be booked in P&L Account. It is claimed that no Directors salary were booked in the assessee’s books of accounts , as rather the same were booked in the books of accounts of the sister concerns. Unfortunately, the assessee has not filed audited financial statements before the Tribunal.
The recording of dissatisfaction by the AO that having regard to the kind of the assessee, suo motu disallowance made by the tax-payer under Section 14A was not correct , is a mandatory requirement as approved by Hon’ble Supreme Court in Maxopp(supra), before proceeding to apply the theory of apportionment. We have observed that in the instant case no disallowance of expenditure was made suomotu by the assessee to have been incurred by the assessee , having regards to accounts of the assessee, in relation to earning of the exempt income. The claim is made that no expenditure was incurred by the assessee for earning of an exempt income as even Directors Salary are not charged to the assessee company as these are booked in sister concerns . Secondly, it is claimed that being strategic investments in subsidiary/associated companies which are held for long term , it does not entail any expenditure. The Directors undertake decisions , and no expenditure by way of Directors salary is booked in the company. Thirdly, it is claimed that dividend income is deposited directly into bank which does not entail any expenditure. This is a very myopic and simplistic view taken by the assessee. Further, these are especial facts which are in knowledge of the assessee, and the burden of proof is on the assessee to come out truly and correctly with respect thereto. We are conscious of the fact that every year is a different assessment unit , and principles of res-judicata is not applicable to income-tax proceedings, but consistency is to be maintained. In the instant year , the AO has duly recorded his dissatisfaction that the claim of the assessee that no expenditure was incurred having regard to accounts of the assessee with respect to earning of exempt income , was not correct. Thus, facts in the instant case are different, and hence order of the Tribunal for assessment year 2017-18 cannot be followed , each year being a different assessment unit, and the facts may vary from year to year.The dissatisfaction recorded by the AO is reproduced by us elsewhere in this order. We have also observed that so far as decision of the Tribunal for assessment year 2014-15 is concerned, there the disallowance was made with respect to interest expenses, but the Tribunal delelted the additions that owned funds are more than the investments , and hence no disallowance of expenditure u/s 14A r.w.r. 8D(2)(ii)(as was applicable at that time) was warranted. Now , for the impugned assessment year , amended Rule 8D effective from 02.06.2016 is applicable, and now no disallowance of interest expenses are required to be separately made, but rather disallowance u/r 8D(2)(ii) is with respect to indirect expenses which is to be computed @1% of the annual average of the monthly averages of the opening and closing balances of value of investment, income from which does not or shall not form part of the total income , is required to be computed. So far as disallowance u/r 8D(2)(iii)(before amendment) as was made by Revenue for assessment year 2014-15, wherein the same stood deleted by the Tribunal , we have given elaborate reasons in this order so far as disallowance u/r 8D(2)(ii) (amended rule) is concerned, including on theory of apportionment as approved by Hon’ble Supreme Court in the case of Maxopp(supra).
We would also like to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon, and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into profit and declare dividend to the shareholders . Such dividends in the hands of shareholders shall be exempt from tax ( Section 10(34) of the 1961 Act for relevant period). No doubt , the returns can also come by way of divestments of these investments but normally strategic investments are made with long term horizon where objective is to set up business and growth of these business over a long period of time. In these type of strategic investments, the investor has to normally devote significant time to plan, execute and monitor these investments regularly and periodically to ensure that these strategic investments are turned viable and profitable. These Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals are required before setting up the same. There will be regular monitoring of these investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. Further, infrastructure costs as well statutory/ regulatory costs are required to be incurred. There will definitely be an expenditure incurred towards administrative , infrastructure and management cost etc. towards planning, executing , maintaining and protecting these investments . There is no prescribed format for recording of the satisfaction. There could be mixed expenses which could be directed towards both towards earning of exempt income as well taxable income, such as infrastructure cost, salaries of staff, travels , meeting /sitting fee, Directors salary , shareholders meeting expenses, maintenance of statutory records which may include even maintenance of record of investments, audit fee etc. so on and so forth.The theory of apportionment will apply , if the AO is not satisfied with the correctness of claim by the assessee wrt expenditure incurred in relation to earning of an exempt income. To say that dividend is credited /deposited online into bank account and no expenditure is incurred in relation to earning of an exempt income is taking a too simplistic view of the relevant provisions of the statute. We have gone through the chart of expenses to the tune of Rs. 221.36 lacs submitted by the assessee, and we have prima facie observed that there are several expenses which could be directed towards both earning of an exempt income as well taxable income as these are mixed expenses directed both towards earning of an exempt income as well taxable income, theory of apportionment shall apply. Since the AO was dissatisfied with the contentions of the assessee that no expenditure were incurred by the assesse having regard to its account in relation to earning of an exempt income, , the Rule 8D of the 1962 Rules will get attracted. Further, as provided under Rule 8D(2) of the 1962 Rules, the disallowance cannot exceed the total expenditure claimed by the assessee. Since, the assessee has not filed audited financial statements before us, it will be appropriate keeping in view facts and circumstances of the case, that the matter be restored to the file of the AO for computing the disallowance u/s 14A r.w.r. 8D of the 1962 Rules. The appeal of the Revenue is allowed for statistical purposes. We order accordingly.
In the result,the appeal of the Revenue is allowed for statistical purposes.