Disallowance under Section 14A read with Rule 8D upheld due to insufficient voluntary disallowance

By | January 13, 2026
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Disallowance under Section 14A read with Rule 8D upheld due to insufficient voluntary disallowance

 

Issue

Whether the Assessing Officer was justified in invoking Section 14A read with Rule 8D(2)(ii) to disallow Rs. 1,02,44,219 against exempt income of Rs. 22.42 Crore, rejecting the assessee’s claim that only Rs. 5,774 was incurred to earn such income.

Facts

  • Entity & Income: The assessee company filed its return for AY 2017-18 declaring taxable income of Rs. 78,47,890. It earned substantial exempt income (dividends) of Rs. 22,42,21,824.

  • Investment Portfolio: The total investment stood at Rs. 124,33,48,325. The assessee claimed these were funded by interest-free funds (share capital, reserves, internal accruals) and no interest expenditure was claimed.

  • Assessee’s Claim: The assessee made a voluntary disallowance of only Rs. 5,774 (demat charges), arguing no other expenditure was incurred to earn the exempt income.

  • AO’s Action: The Assessing Officer (AO) noted that no separate accounts were maintained for exempt income. Dissatisfied with the claim that only Rs. 5,774 was spent to manage a ~Rs. 124 Crore portfolio, the AO invoked Rule 8D(2)(ii).

  • Disallowance Calculation: The AO calculated disallowance at 1% of the annual average of the monthly average of investments, resulting in an addition of Rs. 1,02,44,219.

  • CIT(A) Ruling: The CIT(A) upheld the AO’s order, noting that the disallowance was well within the limit of the total exempt income earned.

Decision

  • Rejection of Assessee’s Claim: The Tribunal termed the assessee’s claim (that only Rs. 5,774 was spent to earn ~Rs. 22.42 Crore exempt income) as “untenable.”

  • Analysis of Expenses: The Tribunal analyzed the P&L account, noting total expenses of Rs. 2.73 Crore (including Rs. 2.66 Crore in employee costs). It held that attributing such high costs solely to a royalty income of Rs. 3.45 Crore was disproportionate.

  • AO’s Satisfaction: The Tribunal ruled that the AO correctly recorded dissatisfaction because the assessee failed to maintain separate books for exempt income activities. Managing a portfolio of Rs. 124 Crore inherently requires administrative effort (salaries, IT, rent, overheads).

  • Rule 8D Applicability: Since the assessee failed to provide a credible basis for expense attribution, the invocation of Section 14A read with Rule 8D was mandatory.

  • Distinguishing Precedents: The Tribunal distinguished the assessee’s reliance on a previous case (ITA No. 307/CHD/2023), noting that the prior case dealt with Section 263 (Revision) jurisdiction, whereas the current case dealt with the merits of an addition under Section 14A.

  • Final Verdict: The appeal was dismissed, and the disallowance of Rs. 1,02,44,219 was upheld.

Key Takeaways

  • Proportionate Expenditure: Courts are skeptical of claims that massive investment portfolios yielding high exempt income require zero or negligible management cost.

  • Administrative Overheads: Even if no direct interest is paid, administrative costs (salaries, rent, utilities) are considered inextricably linked to investment activities under Section 14A.

  • AO’s Satisfaction: The AO can validly reject the assessee’s claim if the attribution of expenses is not credible or if separate accounts for exempt income are not maintained.

  • Rule 8D Mandate: Once the AO records valid dissatisfaction with the assessee’s voluntary disallowance, the application of the formula under Rule 8D becomes mandatory.

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, ‘B’ CHANDIGARH
M/s Trident Group Limited, SCO 20-21, Sector 9-Deduction, Chandigarh.
Vs
The DCIT, Central Circle-1, Ludhiana.
Date of Pronouncement : 23.12.2025
ITA No. 274/CHD/2025

Source :- Judgement