Disallowance for Exempt Income Expenses Must Be Based Only on Investments That Actually Yielded Income.

Issue

For the purpose of disallowing expenditure under Section 14A, should the calculation be based on the assessee’s entire investment portfolio, or should it be restricted only to those specific investments that generated the exempt income during the relevant year?

Facts

For the Assessment Year 2018-19, the assessee-company earned exempt dividend income of ₹8 crores.
The assessee made a suo motu (voluntary) disallowance under Section 14A, calculating it based only on the value of the investments that actually yielded this exempt dividend income.
The Assessing Officer (AO), however, disregarded the assessee’s calculation. He applied Rule 8D to the entire investment portfolio of the company, resulting in a much larger disallowance of ₹3.84 crores.
The facts of the case were identical to a previous assessment year where the assessee’s method of suo motu disallowance had been accepted.

Decision

The court held in favor of the assessee. It directed the Assessing Officer to delete the enhanced disallowance and restrict it to the suo motu amount calculated by the assessee, thereby following the precedent set in the assessee’s own case for the earlier year.

Key Takeaways

Principle of Consistency: Tax authorities should maintain consistency in their approach. If a particular method of calculation was accepted in a prior year on identical facts, it should generally be followed in subsequent years unless there is a change in facts or law.
Rational Nexus Required: A disallowance under Section 14A can only be made in relation to expenditure incurred to earn income that is exempt from tax. Therefore, the calculation must be based only on investments that actually generated exempt income in that specific year, not on the entire pool of investments.

Disallowance Under Section 14A Not Addable to Book Profits for MAT Calculation Under Section 115JB.

Issue

Can an Assessing Officer make an adjustment to the “book profits” computed under Section 115JB (for Minimum Alternate Tax) by adding back the amount of expenditure disallowed under Section 14A?

Facts

While computing the assessee’s tax liability for AY 2018-19, the Assessing Officer made a disallowance of ₹3.84 crores under Section 14A read with Rule 8D.
In addition to making this disallowance under the normal provisions of the Act, the AO also added this amount to the book profits for the purpose of calculating the Minimum Alternate Tax (MAT) liability under Section 115JB.
The assessee contested this adjustment, relying on the binding decision of a Special Bench of the Income Tax Appellate Tribunal in the case of Vireet Investment (P.) Ltd.

Decision

The court ruled in favor of the assessee, following the established legal precedent. It directed the Assessing Officer to delete the adjustment made to the book profits, confirming that a disallowance computed under Section 14A cannot be added back for the purpose of calculating MAT under Section 115JB.

Key Takeaways

Book Profits Are Ring-Fenced: The computation of “book profits” under Section 115JB is a self-contained code. Adjustments can only be made as are specifically listed in the Explanation to that section.
No Automatic Import of Disallowances: Disallowances made under the normal computation provisions of the Income-tax Act (like Sections 14A, 37, 40A, etc.) cannot be automatically imported into the calculation of book profits for MAT unless an item is explicitly covered by the adjustment clauses of Section 115JB.
Binding Precedent: The issue is well-settled by the Special Bench in the Vireet Investment case, which has been consistently followed, establishing a clear legal principle on this matter.

IN THE ITAT MUMBAI BENCH

Gateway Distriparks Ltd.

DCIT

SAKTIJIT DEY, Vice President
and PADMAVATHY S, Accountant Member

I.T.A. No. 3300 (Mum) of 2025
[Assessment year 2018-19]

SEPTEMBER 3, 2025

Ashok Kumar Jain, AR for the Appellant. Arun Kanti Datta, CIT-DR for the Respondent.

ORDER

Padmavathy S, Accountant Member.- This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)-48, Mumbai [In short ‘CIT(A)’] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 25.03.2025 for Assessment Years (AY) 2018-19. The assessee has raised the following the grounds of appeal:

“1. That the order of Ld. CIT (A) is against the law, facts, principles of natural justice and all other principles and rules of law and therefore liable to be set aside.

2. That Ld. CIT(A) is not justified in not condoning the delay in filing of appeal which is delayed due to sufficient cause duly demonstrate before Ld. CIT(A) which is based on surmises and conjectures and contrary to provisions of law. As such the delay in filing of appeal need to be condoned and the appeal may be decided on merit.

3. That Ld. CIT(A) has erred in law in upholding the action of Ld. AO in not giving consequential effect to order U/s 154/143(1) dated 02.10.2021 in taking income computed U/s 143(1) dated 22.12.2019 of Rs. 43,31,08,320/- instead of Rs. 33,12,21,600/- determining U/s 154/143(1) dated 02.10.2021 resulting in addition of Rs. 10,18,86,720/- which is contrary to facts, provisions of law, principles of natural justice and based on surmises and conjectures and as such income assessed U/s 154/143(1) dated 02.10.2021 should be taken and the excess addition to income of Rs. 10,18,86,720/- is liable to be deleted.

4. That the Ld. CIT(A) has erred in law in upholding the disallowance of Rs. 3,98,58,320/- made by Ld. AO U/s 14A on account of expenditure deemed to have been incurred for earning exempt dividend income as against appellant’s su-moto disallowance of Rs. 14,84,000/- on the investment which has generated dividend income which is contrary to facts, provisions of law, principles of natural justice and based on surmises and conjectures and as such the excess disallowance of Rs. 3,83,74,320 was liable to be deleted.

5. That Ld. CIT(A) has erred in confirming the action of Ld. AO in adding Rs. 3,83,74,320/- to the book profit in computing the liability U/s 115JB of the Act which is contrary to facts, provisions of law, principles of natural justice and based on surmises and conjectures and as such the action of Ld AG needs to be undone and addition to book profit so made was liable to be deleted.”

2. The assessee is a company and is an Indo-Singaporean Joint-Venture operating a Containers Freight Station (CFS) in Navi Mumbai. The assessee filed the return of income for AY 2018-19 on 24.09.2018 declaring a total income of Rs. 33,12,21,600/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) notice that the assessee has earned an exempt income of Rs. 8,00,00,000/- from dividend from the investment made in M/s Gateway East India Pvt. Ltd (GEIPL). The assessee has made a suo-motu disallowance of 1% of investments earning exempt income amounting to Rs. 14,84,000/- i.e. 1% of investment made in GEIPL. The AO was of the view that the suo-motu disallowance is very less compared to the exempt income earned and therefore, the AO considered the entire investments made by the assessee to make a disallowance of Rs. 3,83,74,320/- under section 14A r.w.r. 8D. Aggrieved the assessee filed further appeal before the CIT(A). There was a delay of 1297 days in filing the appeal before the CIT(A). The assessee filed a petition seeking condonation of delay stating the following reasons:

“1.

M/s Gateway Distriparks Limited (GDL) having its registered office at Sector 6, Dronagiri, Taluka Uran, Navi Mumbai, Raigarh, Maharashtra 400707. The appellant company is in the business of providing intermodal logistics. For the AY 2018-19, the ITR had been filed on 24.09.2018 u/s 139(1) of the Act, declaring total income to the tune of Rs. 33,12,21,600/- mainly under the head Income from Business and Profession. The appellant received intimation u/s 143(1) of the Act, dated 22.12.2019 wherein income was determined at Rs. 43,31,08,320/

A Rectification application was filed on 13.01.2020 for rectifying the order u/s 143(1) and order u/s 154 of the Act, dated 02.10.2021 was passed whereby the income was recomputed at Rs. 33,12,21,600/- The order u/s 154 impliedly concluded that no changes in income were called for.

Subsequently, scrutiny order u/s 143(3) dated 04.03.2021 was passed making disallowance of Rs. 14A of Rs. 3,83,74,320 and determined income of Rs. 45,53,49,984/

Thereafter, survey proceedings under section 133A of the Act were initiated on 24 November 2022, at various business premises of M/s Gateway Distriparks Limited. Assessment and re-assessments were undertaken in the case of the appellant and its group entities. For the year under consideration, the reassessment order u/s 147 r.w.s 143(3) was passed on 09.07.2024.

While filing appeal before Hon’ble CIT for reassessment order passed u/s 147 r.w.s 143(3) for AY 2018-19 it was noticed that the assessing officer had computed the income in the reassessment order proceeding on the basis of the income determined in the assessment order u/s 143(3) and not on the income as taken in order u/s 154 r.w.s 143(1). Accordingly, it dawned on the appellant that an appeal should have been filed against the order passed u/s 143(3).

It is to be appreciated that the appellant is a corporate entity and M/s Rakesh Garg & Associates as the counsel and advisor for the entity handles all their tax matters. Further, the official mail id for communication is also the advisor’s only i.e. rgandassociates@gmail.com. It therefore follows that the advisor was not able to properly evaluate the assessment order and further guide the appellant in filing of the appeal because the employee that was handling the company’s case had left the organization and the advisor was also not in a position to attend the matter properly because of indisposition at that time. A copy of the affidavit of Mr. Rakesh Garg is being attached confirming all the above facts (Copy of Affidavit of Mr. Rakesh Garg attached as Annexure-1).

Aggrieved by the order of assessment u/s 143(3) as referred above, the appellant has filed an appeal before your honour which is delayed by 1297 days.

In the light of the aforesaid submissions, it is apparent that the delay in filing of appeal was unintentional and attributable to inadvertent default of the Counsel. The Appellant had acted in a bona fide manner. The moment the lapse was noticed, immediate corrective steps were taken by the appellant company and the appeal was filed. Further, it is to be noted that in the appellant’s case, similar 14A disallowance was made by the department in previous years and the Hon’ble ITAT, Mumbai have passed the order in favour of the appellant.”

3. The CIT(A) did not condone the delay and dismissed the appeal in limine. The assessee is in appeal before the Tribunal against the order of the CIT(A).

4. The ld. AR submitted that if the decision of the Hon’ble Supreme Court Cognizance for Extension of Limitation, In re 307/441 ITR 722 (SC), for extension of limitation during Covid period is to be considered the delay in filing the appeal before the CIT(A) comes to 875 days. The ld. AR during the course of hearing submitted that the delay in filing the appeal before the CIT(A) was due to lack of proper advise by the consultant. The ld. AR further submitted that the consultant is a cancer survivor and due to his health condition did not devote the required time to provide proper advise to the assessee. The ld AR also submitted that the assessee before the CIT(A) has filed the affidavit from the consultant and also the documents regarding his health condition. The ld AR argued that the CIT(A) has not considered the details furnished and dismissed the appeal in limine. The ld AR further argued that the delay is unintentional and due to reasons beyond the control of the assessee and accordingly submitted that the CIT(A)’s order dismissing the appeal without condoning the delay is against the principles of natural justice. On the merits of the impugned issue the ld. AR submitted that for AY 2016-17 and 2017-18 the CIT(A) has decided the issue pertaining to disallowance under section 14A in favour of the assessee and that the revenue filed further appeal before the Tribunal against the said order. The ld. AR further submitted that the Co-ordinate Bench while deciding the revenue’s appeal for AY 2016-17, Joint Commissioner Of Income Tax (Osd) v. Gateway Distriparks Ltd. [IT Appeal No. 2432 (Mum.) of 2025, dated 21-7-2025], has decided the issues in favour of the assessee by holding that

“6 We have heard the rival submissions and perused the material available on record. The issue under consideration is that the assessee, on a suo motu basis, disallowed a sum of Rs.59,50,496/-, being 0.5% of the average value of investments that actually yielded dividend income, namely Rs.104,16,99,000/-and Rs. 14,84,00,000/-. It is an admitted position that the remaining investments did not yield any exempt income during the relevant assessment year. The revenue, on the other hand, has raised a ground relying on the amendment introduced by the Finance Act, 2022, whereby an Explanation was inserted to section 14A of the Act. The Revenue contends that the said amendment has retrospective application and is applicable to the impugned assessment year. However, the issue of retrospective applicability of the said amendment stands settled by the Hon’ble Delhi High Courts in the case of PCIT v. ERA Infrastructure (India) Ltd. (supra), wherein it has been held that the Explanation to section 14A inserted by the Finance Act, 2022 is prospective in nature and cannot be applied to assessment years preceding the amendment.

In light of the above binding precedent, following the order of Reliance Power Ltd (supra) we find that the Ld. CIT(A) has rightly accepted the assessee’s computation and restricted the disallowance under section 14A of the Act to Rs.59,50,496/-which is in accordance with the law applicable to the assessment year under consideration.

We do not find any infirmity in the order of the Ld. CIT(A) warranting interference Accordingly, we uphold the same and dismiss the grounds raised by the revenue.

7. In the result, the appeal filed by the revenue bearing ITA No.2432/Mum/2025 is dismissed,”

5. The ld. AR therefore submitted that the assessee is having a good case on merits which cannot be denied on the technical grounds.

6. The ld. DR on the other hand supported the order of the CIT(A) by submitting that the reasons for delay as submitted before the CIT(A) does not mention the sequence of the events. On merits the ld. DR submitted that the suo-motu disallowance made by the assessee needs factual examination and therefore prayed that the issue may go back to the CIT(A) for verification on merits.

7. We heard the parties and perused the material on record. The CIT(A) while dismissing the appeal in limine has stated that the assessee has not provided reasons with supporting evidences for the delay and that the sufficient cause for the delay was not demonstrated, however, from the perusal of records, we notice that the assessee has primarily quoted lack of proper advice due to ill-health by the Tax Consultant as the main reason for the delay and the inadvertent mistake on the part of the employee of the assessee. We further notice that the assessee has filed an affidavit from the Tax Consultant before the CIT(A) in this regard and other relevant documents. The assessee has also submitted before the CIT(A) that the impugned issue has been decided by the CIT(A) in assessee’s own case for earlier years in favour of the assessee. However it is noticed that the CIT(A) did not consider any of the submissions of the assessee and dismissed the appeal in in limine. In this regard it is relevant to take note of the following observations of Hon’ble Supreme Court in the case of (Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 ) where the following six principles were laid down –

(1)

Ordinarily, a litigant does not stand to benefit by lodging an appeal late.

(2)

Refusing to condone delay can result in a meritorious matter being thrown at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties.

(3)

‘Every day’s delay must be explained’ does not mean that a pedantic approach should be made. Why not every hour’s delay, every second’s delay? The doctrine must be applied in a rational, common sense and pragmatic manner.

(4)

When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right in injustice being done because of a nondeliberate delay.

(5)

There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk.

(6)

It must be grasped that the judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so.

8. From the perusal of the above principles it is clear that when substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right for injustice being done because of non-deliberate delay. In the light of the above legal position when we examine the assessee’s case, we notice that the CIT(A) himself has given relief to the assessee in earlier years on the identical issue and the CIT(A) for the current year though knowing his own stand in earlier has dismissed the appeal on the ground of delay. Considering the ratio laid down with regard to delay by the Apex Court and the facts in the present case, we are of the view that the CIT(A) ought to have taken into consideration the circumstances / evidences for the delay ought not to have dismissed the appeal in limine more so when the assessee is having a good case on merits as admitted in earlier years.

9. On merits from the perusal of the findings of the coordinate bench in assessee’s own case as extracted in the earlier part of this order, we notice that the facts are identical where the assessee has made the suo motu disallowance considering only those investments which earn exempt income. Respectfully following the above decision we direct the AO to restrict the disallowance made under section 14A to the suo-motu disallowance made by the assessee.

10. We further notice that the AO has made adjustment to the books profits towards the disallowance made under section 14A. The said issue stands covered by the decision of the Special Bench in the case of Asstt. CIT v. Vireet Investment (P.) Ltd. 415/165 ITD 27 (Delhi – Trib.) and therefore we direct the AO to delete the adjustment made to the book profits computed under section 115JB of the Act towards disallowance made under section 14A. It is ordered accordingly.

11. In result, the appeal of the assessee is allowed.