Pragati Automotive Engineers Private Limited vs Income Tax Officer, Ward 20(1)

PER RAMIT KOCHAR, AM:

This appeal in ITA No. 281/Pun/2026 for Assessment Year: 2017-18 has arisen form the learned CIT(A)’s appellate order u/s 250 dated 31/12/2025 in DIN & Order No: ITBA/APL/S/250/2025-26/1084275093(1), which in turn has arisen from the assessment order dated 28.10.2019 passed by the AO u/s 143(3)of the Income Tax Act, 1961.

The assessee has raised the following grounds of appeal:

Brief facts of the case are that the assessee filed its return of income declaring total income of Rs.200/- on 31.11.2017. The assessee’s case for A.Y.2017-18 was selected by Revenue for limited scrutiny under CASS . The reason being for said selection being “Expenses incurred for earning exempt income”. Statutory notices were issued by the AO u/s 143(2) and 142(1) of the 1961 Act, from time to time during the course of assessment proceedings. The assessee participated in the assessment proceedings, and submitted its replies/responses before the AO. The assessee company is stated to be engaged in the business of automotive engineers, dealers in all kind of automobiles etc. . During the year under consideration, the assessee has earned income from interest and profit on sale of shares. The AO observed that the assessee has earned exempt income to the tune of Rs. 2,07,642/- , while the assessee has not made any disallowance of the corresponding expenses u/s 14A of the 1961 Act. The assessee was asked by the AO to explain the same. The assessee submitted that it earned exempt income of Rs. 2,63,115/- , being Rs 2,07,642/- as dividend income and Rs.55,473/- as long term capital gains exempt u/s 10(38). It was submitted that the assessee paid taxes u/s 115JB of the 1961 Act. It was submitted that the assessee incurred total expenses (after considering add back of expenses) to the tune of Rs. 7,54,396/- which were all incurred for earning taxable income. These expenses are routine and operational expenses such as audit fee , ROC expenses, bank charges , employees benefit expenses for day to day business operations and were not incurred for earning exempt income. Thus, the same cannot be considered for disallowance u/s 14A. The AO invoked the provisions of section 14A of the 1961 Act r.w.Rule 8D and made disallowance to the tune of Rs.7,54,596/- , detailed as hereunder:

Aggrieved, the assessee filed first appeal with ld. CIT(A). The assessee contended before ld. CIT(A) that no expenditure has been incurred by the assessee company to earn exempt income of Rs. 2,63,115/- as the expenses claimed in the Profit and Loss Account are primarily salaries and routine administrative expenses which were wholly for taxable business operations. The assessee contended that the AO mechanically applied Rule 8D without recording mandatory satisfaction or establishing nexus between the expenses and exempt income . The assessee contended that even FDR on which no exempt income are earned are included while computing daisallowance u/s 14A read with Rule 8D. The Ld. CIT(A) dismissed the appeal of the assessee by confirming the addition made by the AO. The Ld. CIT(A) observed as that assessee has earned dividend income of Rs. 2,07,642/-and long term capital gain Rs.55,473/- which were claimed as an exempt income. The ld. CIT(A) observed that the assessee has investment of Rs. 21.20 crores as on 31.03.2017 and Rs. 24.69 crores as on 31.03.2017. The assessee has claimed expenses of Rs. 7,54,396/- . The ld. CIT(A) observed that the routine business expenses such as salaries, audit fees, ROC fees and office expenses are common in nature and cannot be segregated from the activities relating to investment. The ld. CIT(A) referred to decision in the case of CIT v. United General Trust Limited (200 ITR 488) and DCIT v. Viraj Profiles Limited (156 ITD 72). The ld. CIT(A) observed that the AO has duly recorded satisfaction. Since the assessee has incurred expenses of Rs. 7,54,396/- , and 1% disallowance u/r 8D works out much higher, the ld. CIT(A) observed that the AO has rightly restricted and disallowed Rs. 7,54,396/- u/s 14A r.w.r. 8D.

Still Aggrieved , the assesse filed second appeal before the Tribunal. At the outset, Ld. Counsel for the assessee submitted that the assessee has earned exempt income by way of dividend income of Rs.2,07,642/- and Rs. LTCG on sale of shares of Rs. 55,473/-u/s 10(38), which were claimed as an exempt income under the 1961 Act. The Ld. Counsel for the assessee relied upon the judgment and order of Hon’ble Delhi High Court in the case of Joint Investments (P) Ltd. v. CIT (59 Taxmann.com 295) and Judgment and order dated 22.12.2023 of Hon’ble Delhi High Court in the case of CIT-Central-1 v. RRPR Holding Pvt. Ltd. in ITA No. 808/2023 , and submitted that the disallowance u/s 14A read with Rule 8D cannot exceed the exempt income. Thus, prayers were made to restrict disallowance u/s 14A to the exempt income earned by the assessee.

I have considered rival submissions and perused the materials available on record. I have enumerated facts in brief and contentions of both the parties in the preceding para’s of this order, and the same are not repeated. Short question which has arisen in this appeal is with respect to disallowance u/s 14A of the 1961 Act. The assessee has earned in aggregate exempt income of Rs. 2,63,115/- during the year under consideration. The assessee has incurred total expenditure to the tune of Rs. 7,54596/- which are stated to be incurred towards Salaries, Audit Fees, ROC Fees and other operational business expenses. The Average investment held by the assessee were to the tune of Rs. 22,95,05471.50. The AO applied Rule 8D of the 1962 Rules to quantify the disallowance which work out to be 1% of average investment i.e. Rs. 22,95,054.72, but the disallowance was restricted to actual expenditure incurred i.e. Rs. 7,54,596/-. The assessee has relied upon decision of Hon’ble Delhi High Court in the case of Joint Investments Private Limited(supra) and RRPR Holdings Private Limited(supra) to contend that the disallowance be restricted to the exempt income earned by the assessee i.e. to the tune of Rs. 2,63,115/-. The impugned assessment year under consideration is assessment year 2017-18. There is merit in the contention of the assessee , and the aforesaid judgments and orders of Hon’ble Delhi High Court are binding on this Tribunal. Thus, I restrict disallowance to Rs. 2,63,115/- u/s 14A. The amendment brought in Section 14A by insertion of Explanation by Finance Act , 2022 w.e.f. 01.04.2022 is held to be prospective by Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure India Limited in ITA No. 204/2022(448 ITR 674). The appeal of the assessee is partly allowed in the manner as indicated above. I order accordingly.

In the result,the appeal filed by the assessee is partly allowed as indicated above.