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Judgment
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER :
This captioned appeal has been filed by the learned Commissioner of Income Tax (Appeals)-NFAC, Delhi (hereinafter referred as ‘CIT(A)/NFAC’) order dated 10.10.2025 arising from the assessment order under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) dated 24.09.2022 issued by the Income Tax Department for A.Y. 2020-21.
Grounds of appeal filed by the assessee are as under :
1.Without prejudice, the Ld. CIT(A) has failed to appreciate that the assessee's own funds and reserves substantially exceeded the investments in shares of its wholly owned subsidiaries, and hence no part of the interest expenditure could be attributed to such investments.
A reference regarding own funds and investments are as follows:
Particulars As on 31st March'2020 (Rs. In Crore) As on 31st March 2019 (Rs. In Crore) Net Worth 1452.77 1152.42 Investments in wholly owned subsidiaries (100% subsidiaries) 267.60 157.60 2."Further and without prejudice, the Ld. CIT(A) has erred not appreciating that the investments are in wholly-owned subsidiary companies made out of commercial/business expediency and do not entail any specific administrative expenditure so as to warrant any disallowance under section 14A, particularly in the absence of exempt income.”
3.The Ld. CIT(A) erred in upholding the disallowance in haste and are against principles of natural justice as no sufficient opportunity of being heard was given to the assessee to explain the doubts the Ld. CIT(A) had in his mind. The order of appeal shows a casual approach where addition made by the Ld. CIT(A) is not correct. The Ld. CIT(A) had sufficient time to conclude the appeal in light of all the information and documents which he did not.
4.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance under section 14A of the Act despite the fact that the assessee had not earned any exempt income during the relevant previous year. It is settled law that in the absence of exempt income, no disallowance can be made under section 14A.
5.That the Ld. CIT(A) erred in applying the amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and explanation that will take effect from 1-4-2022 and cannot be presumed to have retrospective effects.
6.The Ld. CIT(A) erred in relying on the CBDT circular no. 5/2014 which is bad in law as the same overrides the provisions of section 14A of the income tax act 1961 and Rule 8D of the income tax rules. Circulars issued by the CBDT are not binding upon the taxpayer/Courts.
The brief fact of the case is that the assessee Satin Creditcare Network Ltd. ('Company') is a public limited company and a leading microfinance institution In India and is registered with Reserve Bank of India as Non-Banking Finance Company-Micro Finance Institution ('NBFC-MFI') since November 2013. The company filed the income tax return for the AY: 2020-21 declaring a net taxable income of Rs.2,22,52,78,700/- on dated 14-02-2021.
The Ld AO while completing the assessment under section 143(3), invoked the provisions of section 14A read with Rule 8D and computed a disallowance of ₹ 2,67,60,250. This disallowance has been calculated at the rate of 1% being the balance outstanding for investments in subsidiaries at the end of the year. Upon appeal, the CIT(A) upheld the disallowance. Aggrieved the assessee is before us.
The ld counsel of the assessee submitted that during the year the assessee company had made investments in two of its 100% subsidiary companies. The investment was made of its own internal accruals and funds, mainly consisting of share capital and free reserves available with the assessee company. These investments were made by the assessee company for business and strategic purposes to support business operations and growth of the company and the group as a whole. Secondly, the assessee had not earned or received any exempt income from these two subsidiaries during the relevant previous year. No dividend or any other form of exempt income was received by the holding company for the year. Thirdly, it was vehemently argued that the AO proceeded with the disallowance mechanically without recording the mandatory satisfaction as required under section 14A(2), and without demonstrating any nexus between the expenditure incurred and any exempt income (which did not exist in the first place).
Per contra, the ld DR relied on the orders of AO and the CIT(A).
We have heard the rival submissions and have perused the materials on record. We find that the fact that no dividend income or any exempt income was received/accrued from the wholly owned subsidiaries during the year under consideration, has not been rebutted. Therefore, following the decision of hon’ble Delhi Court in Cheminvest Ltd. vs. CIT (378 ITR 33) (Del) and Era Infrastructure (India) Ltd (2022) 141 taxmann.com 289(Delhi) wherein it was held that no disallowance can be made in absence of exempt income, the disallowance u/s 14A is deleted. The hon’ble Delhi Court has also held in Era Infrastructure (India) Ltd (supra) that amendment made in Finance Act 2022 to section 14A will take effect from 01.04.2022 and does not have retrospective effect. Ground 4 and 5 are allowed.
We further find that the assessee has claimed that its Net Worth (Paid up capital + free reserves) of the assessee as on 31st March'2020 was Rs 1,452.77 crore whereas the Investments in its wholly owned subsidiaries (100% subsidiaries) i.e., Satin Housing Finance Company and Satin Finserv Limited is only Rs 267.60 crore. We find that this fact has not been rebutted by the Revenue. In such facts and circumstances, there are catena of judicial precedents in the context of Section 14A, where the Courts have held that where the investments are made out of own funds, the proportionate disallowance of interest expenditure is unwarranted. The hon’ble Supreme Court in the case of CIT vs. UTI Bank Ltd [2022] 142 taxmann.com 136 (SC) mandated the law that where interest free own funds available with assessee banks exceeded their investments in tax-free securities; investments would be PRESUMED to be made out of assessee's own funds and proportionate disallowance would not be warranted under Section 14A of the Act. Following the hon’ble Court, the disallowance is deleted on this count also. Ground 1 is allowed.
In the result, the appeal of the assessee in ITA 8676/Del/2025 is allowed.