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Judgment
PER SUDHIR KUMAR, JUDICIAL MEMBER:
This appeal by the assessee is directed against the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] vide order dated 29.12.2025 pertaining to A.Y. 2022-23 arising out the assessment order passed u/s. 143(3)/144 of the Income-tax Act, 1961, (in short ‘the Act’) on the following grounds:
That the CIT(A) erred on facts and in law, in upholding the disallowance of Rs. 8,82,35,000/- u/s. 14A of the Act, by holding the same to be expenditure incurred for earning exempt income.
That the CIT(A) failed to appreciate that in the absence of any exempt income earned in the relevant assessment year, the provisions of section 14A of the Act had no application at the very threshold.
The brief facts of the case are that the assessee company engaged in the business of manufacture of polyester chops of all grades, Biaxially Oriented Polyester Film, Biaxially Oriented Poly Propylene Film (BOPP), metalized film and PVDC films, non-woven material fabrication etc. For the previous year relevant to assessment year 2022-23, the assessee filed return declaring income of Rs. 14,01,91,35,300/- under normal provisions of the Income Tax Act, 1961. In the scrutiny assessment completed vide order dated 14.3.2024, passed u/s. 143(3) r.w.s. 144B of the Act, income of the assessee was assessed at Rs. 15,62,89,06,935/- after making various additions. Against which the assessee preferred the appeal before the CIT(A), who deleted two additions, but upheld the disallowance of Rs. 8,82,35,000/- u/s. 14A of the Act. Aggrieved, assessee is in appeal before us.
Ld. Counsel for the assessee submitted that assessee held investment in equity shares of various companies, preference shares, mutual funds, liquid gold series and certain taxable bonds and also submitted that the aforesaid investments did not yield any income, much less exempt income in the relevant assessment year. Further, it is submitted that these investments were even otherwise not capable of yielding any exempt income, in so far as dividend and interest income, if any, on equity shares/mutual funds and bonds was taxable under section 56 of the Act and profit if any, on sale of shares/ mutual funds / bonds was taxable as long / short term capital gains under section 45 of the Act. It was further submitted that AO without recording any valid satisfaction, proceeded to make disallowance of Rs. 8,82,35,000/- u/s. 14A of the Act r.w.s. Rule 8D of the I.T. Rules, 1962, by merely presuming that certain expenditure must have been incurred which requires disallowance. It is further submitted that Ld. CIT(A) simply proceeded to uphold the aforesaid disallowance without appreciating that in the absence of any investment capable of yielding exempt income, provision of section 14A of the Act could not have been invoked, more so when the AO had failed to record any valid satisfaction thereof. He submitted that both the lower authorities erred in making the disallowance u/s. 14A on the reasons no disallowance u/s 14A in the absence of investment capable of yielding exempt income; no valid satisfaction recorded by AO and even otherwise, disallowance could not have exceeded exempt income. He further submitted that in the subsequent assessment year 2023-24, the AO has, on identical facts, accepted the contention of the assessee that in the absence of any investment capable of yielding exempt income, provisions of section 14A of the Act is not at all applicable. It is further submitted that the issue in dispute is squarely covered by the decision of the Coordinate Bench in assessee’s own case for preceding AY 2017-18 to 2019-20 in ITA No. 1705, 1372, 1373, 1706 & 1374/Del/2023 wherein, the Tribunal deleted the similar disallowance made u/s. 14A of the Act by observing that the AO failed to record satisfaction and applied Rule 8D of the rules in a mechanical manner. It is submitted that in the present case the expenses forming part of the profit and loss account have been incurred in relation to earning taxable income of the year and thus no disallowance is warranted, in view of the decision in the case of Maxopp Investment Ltd. 203 Taxman 364 (Del) affirmed by the Hon’ble Supreme Court in 402 ITR 640.
Ld. DR relied upon the orders of authorities below on this issue in dispute.
We have heard the rival contentions and perused the records. It is noted that Ld. CIT(A) simply proceeded to uphold the disallowance made u/s. 14A of the Act without appreciating that in the absence of any investment capable of yielding exempt income, provision of section 14A of the Act could not have been invoked, more so when the AO had failed to record any valid satisfaction thereof. We further note that in the subsequent assessment year 2023-24, the AO has, on identical facts, accepted the contention of the assessee that in the absence of any investment capable of yielding exempt income, provisions of section 14A of the Act is not at all applicable. It is further noted that the instant issue is squarely covered by the decision of the Coordinate Bench in assessee’s own case for preceding AY 2017-18 to 2019-20 in ITA No. 1705, 1372, 1373, 1706 & 1374/Del/2023 wherein, the Tribunal deleted the similar disallowance made u/s. 14A of the Act by holding as under:-
32.Issue No. 3: As with regard to this issue arising out of the appeal of the Department, we find that during the assessment year 2017-18 and 2019-20, the assessee held investments in equity shares of various companies and mutual funds. However, no exempt income was earned on such investments. The disallowance was made by the Assessing Officer by holding that a sum of Rs. 8,30,77,170/- in ASSESSMENT YEAR 2017-18 and Rs. 5,62,51,595/- was explained being incurred for earning exempt income. The Ld. CIT(A) has deleted the allowance.
33.Now, we find no error in the findings of the Ld. CIT(A) that as the assessee has not earned any exempt income from investments in the mutual funds held by it, thus, no question of expenses incurred could have been disallowed u/s. 14a of the Act. Reliance can be placed on the judgement of the Hon’ble Supreme court in Maxopp Investment’s case 203 Taxman 364 (Delhi) as affirmed by the Hon’ble Supreme Court in (2018) 402 ITR 640. Apart from that there is substance in the assertion of the assessee that without recording any satisfaction for applying Rule 8D, the disallowance was made in a mechanical manner. Thus, the issue deserves to be decided against the Department.
We further find that similar issue has been dealt by the Coordinate Bench of the Tribunal in the case of Ahluwali Contracts India Ltd. vs. ACIT ITA 7474/del/2025 (Del. Trib) wherein, it has been observed as under:-
“….5.1 The above findings of the CIT(A) have been considered very carefully but not found to be acceptable. The Ld. CIT(A) held that disallowance u/s. 14A of the Act r.w.s Rule 8D of the IT Rules, 1962 has to be made even if no exempt income is earned in the current year but in arriving at the findings, the Ld. CIT(A) did not appreciate the underlying principle that disallowance u/s. 14A of the Act r.w. Rule 8D of the I.T. Rules, 1962 will be permissible only if the nature of such income would be exempt and not taxable. The fundamental condition for invoking Section 14A is that the expenditure sought to be disallowed must be incurred in relation to income which does not form part of the total income under the Act. In other words, the applicability of Section 14A is contingent upon the existence of exempt income. Pursuant to the amendment to Section 10(34) by the Finance Act, 2020, effective from 2021-22, dividend income is taxable in the hands of the recipient and hence dividend income is no longer exempt in the hands of the shareholder. Thus, in the present case, the assessee even though did not earn dividend income, yet even if it was earned, it would not have been in the nature of exempt income. Therefore, the very foundation for invoking Section 14A is absent in the present case. In view of the above discussion, the submission of the assessee that no disallowance can be made u/s. 14A of the Act is acceptable. Thus, the disallowance of Rs. 6,28,000/- made by the Assessing Officer and confirmed by the Ld. CIT(A) is not sustainable and the same is deleted.”
In the present case the expenses forming part of the profit and loss account have been incurred in relation to earning taxable income of the year and thus no disallowance is warranted, in view of the decision in the case of Maxopp Investment Ltd. (supra) which has been affirmed by the Hon’ble Supreme Court. In view of the aforesaid decisions, the addition sustained by the Ld. CIT(A) is not sustainable in the eyes of law, hence, we delete the same and allow the ground raised by the assessee.
In the result the appeal of the assessee is allowed.