Investments Not Yielding Exempt Income Cannot be Considered for Calculating Disallowance u/s 14A: ITAT
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, gave full relief on a disallowance made under Section 14A of the Income Tax Act.
The company, Ravi Dyeware Company, had earned dividend income of Rs 14,92,904. This income was claimed as exempt under section 10(34) of the Income Tax Act. It had already voluntarily disallowed Rs 2,30,117, as expenditure related to this exempt income.
However, during the assessment proceedings, the Assessing Officer applied Rule 8D and calculated a higher disallowance of Rs 16,98,862. After reducing the suo motu disallowance made by the company, the AO finally made an addition of Rs 14,68,745. The CIT(A) upheld the addition but restricted it to Rs 12.62 lakh. The assessee then approached the ITAT.
The assessee argued that it had enough of its own funds and did not use borrowed money for investments. It also said that only investments that had generated exempt income should be considered for computing disallowance under Rule 8D.
The Tribunal agreed with the assessee company that it had its own sufficient funds and had not used borrowed funds for calculating investments under Rule 8D. It cited a previous High Court’s ruling, where it was clarified that investments that did not earn exempt income cannot be included for calculation under section 14A.
Additionally, the ITAT clarified that disallowance under Section 14A cannot be added back while computing book profits under Section 115JB.
Accordingly, the ITAT ruled that the disallowance under Section 14A was not sustainable. It directed the Assessing Officer to delete the entire addition of Rs 12,62,787. The appeal of the assessee was allowed.
Case Citation: Ravi Dyeware Company Private Limited Vs DCIT (ITAT Mumbai); ITA No.9136/Mum/2025; 15/04/2026; 2016-17
