Disallowance under Section 14A cannot exceed exempt income, and dynamic expenses lack TDS liability.

By | June 26, 2026
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Disallowance under Section 14A cannot exceed exempt income, and dynamic expenses lack TDS liability.

Issue

  • Whether Section 14A disallowance can exceed the actual exempt income earned during the year.

  • Whether a bad debt write-off is allowable if the underlying income was recognized and offered to tax in a previous assessment year.

  • Whether business disallowances under Section 40(a)(ia) apply to employee expense reimbursements, small-value vendor payments below thresholds, unproven catering contracts, or non-regular hotel accommodations lacking explicit room-earmarking contracts.

Facts

  • Section 14A Disallowance: The assessee earned a minor dividend income of ₹0.92 lakhs and claimed it as exempt. The Assessing Officer (AO) computed a disproportionate disallowance of ₹6.50 lakhs under Section 14A read with Rule 8D.

  • Bad Debts: The assessee provided advisory and merchant banking services, recognized the invoice income in AY 2010-11, and subsequently wrote off ₹8.67 lakhs as bad debts in its ledger accounts during the relevant financial year.

  • Employee Reimbursements: The assessee reimbursed employees for tea and coffee expenses incurred during official duties. The primary contract existed between the individual employee and the third-party vendor, not the assessee.

  • Minor Beverage Purchases: The assessee paid third-party vendors ₹21.20 lakhs in total for tea and coffee, with each individual payment falling below the prescribed statutory threshold limit for TDS.

  • Alleged Catering Services: The assessee made separate tea and coffee payments totaling ₹19.49 lakhs that exceeded the individual threshold limits. The AO presumed a catering contract existed, while the assessee maintained these were simple spot purchases of beverages.

  • Hotel Accommodation: The assessee spent ₹2.05 crores on transient hotel rooms and meals for staff training programs. Bookings were made dynamically on an ad-hoc basis without any earmarked rooms, fixed rates, or long-term contracts.

Decision

  • On Section 14A: Held, yes (partly in favor of the assessee). The disallowance under Section 14A read with Rule 8D is strictly restricted to the extent of the actual exempt dividend income earned (₹0.92 lakhs). The remaining balance of the disallowance is deleted.

  • On Bad Debts: Held, yes (in favor of the assessee). The write-off satisfies Section 36(1)(vii) read with Section 36(2) because the income was offered to tax previously and the debt was formally written off in the client’s ledger. The addition is deleted.

  • On Reimbursements: Held, yes (in favor of the assessee). In the absence of a direct privity of contract between the assessee and the third-party vendors, TDS provisions do not apply to simple employee reimbursements. The disallowance under Section 40(a)(ia) is deleted.

  • On Minor Purchases: Held, yes (in favor of the assessee). Since individual payments to the third-party vendors were below the prescribed threshold limits, there was no requirement to deduct TDS. The addition is deleted.

  • On Alleged Catering: Held, yes (in favor of the assessee). The AO cannot make disallowances based on the mere assumption that a contract existed. The assessee cannot be asked to prove a negative, and without material proof of a catering contract, Section 194C is inapplicable.

  • On Hotel Rent: Held, yes (in favor of the assessee). Section 194I applies to hotel accommodations taken on a regular, earmarked basis. Since these bookings were ad-hoc with no legal obligation or fixed room allocations, no TDS was required. The disallowance is deleted.

Key Takeaways

  • Exempt Income Cap: The quantum of disallowance under Section 14A can never outstretch the actual exempt income earned by the assessee during the relevant financial year.

  • Debtor Write-Off Sufficiency: Post the amendment of Section 36(1)(vii), a physical write-off of a debt in the ledger accounts is sufficient to claim a deduction, provided the debt was considered in computing income earlier.

  • Privity of Contract for TDS: For TDS provisions to kick in, a direct contractual relationship must exist between the deductor and the vendor. Employee reimbursements do not create a liability to deduct tax.

  • Presumptions vs. Evidence: The Revenue cannot invent or presume a contract (such as catering or catering services) to apply TDS provisions. The burden lies on the Revenue to prove a contract exists before enforcing Section 194C or Section 40(a)(ia).

  • Ad-hoc Hotel Bookings Outside Section 194I: Transient, non-exclusive hotel stays do not amount to “renting” under Section 194I. Unless specific rooms are earmarked for a designated period under a binding contract, hotel payments are regular business expenses exempt from rent TDS.

IN THE ITAT MUMBAI BENCH ‘C’
ICICI Securities Ltd.
v.
Deputy Commissioner of Income-tax
SANDEEP SINGH KARHAIL, Judicial Member
and Vikram Singh Yadav, Accountant Member
IT Appeal No. 5258 (Mum) of 2025
[Assessment year 2011-12]
MAY  18, 2026
Ms. Krupa Gandhi and Ms. Vidhi Salot for the Appellant. Virabhadra Mahajan, Sr.DR for the Respondent.
ORDER
Vikram Singh Yadav, Accountant Member.- This is an appeal filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [‘Ld.CIT(A)’], dated 26.06.2025, pertaining to Assessment Year (AY) 2011-12.
2. Ground no. 1 was not pressed during the course of hearing and the same is dismissed as not pressed.
3. In ground no. 2, the assessee has challenged the sustenance of disallowance of Rs. 6,49,765/- u/s. 14A read with Rule 8D of Income Tax Rules, 1962. During the course of hearing, the ld. AR submitted that the assessee has received dividend income of Rs. 92,178/- on investment in Bombay Stock Exchange and dividend on Test IDs and disallowance u/s. 14A read with Rule 8D should be restricted to the exempt income so claimed by the assessee. In this regard, reliance was placed on Coordinate Bench decision in case of Sapphire Fintech Pvt.Ltd. v. DCIT 216 ITD 568 (Mumbai – Trib.).
4. The ld. DR has been heard who has relied on the order passed by the lower authorities.
5. We have heard the rival contentions and perused the material available on record. It is an admitted fact that the assessee has earned dividend income of Rs. 92,178/- which was claimed as exempt. It is a settled position that the disallowance u/s. 14A cannot be more than the exempt income. The Coordinate Bench in case of Sapphire Fintech Pvt. Ltd. (supra) following the decision of Hon’ble Bombay High Court in case of Nirved Traders (P.) Ltd. v. DCIT [ITA No.149 of 2017, dated 23-4-2019], has also held that the disallowance u/s. 14A cannot be more than the exempt income. Accordingly, we direct the Assessing Officer to restrict the disallowance to the extent of dividend income and the remaining disallowance is directed to be deleted.
6. In the result, ground no. 2 of the assessee is partly allowed.
7. In ground no. 3, the assessee has challenged the sustenance of disallowance of bad debts written off amounting to Rs. 8,67,059/-. In this regard, the ld. AR submitted that the assessee has written off bad debts amounting to Rs. 8,67,059/- and claimed the same as deduction u/s. 36(1)(vii) read with section 36(2) of the Act. It was submitted that said bad debts were in respect of advisory services provided to PNB Housing Finance Ltd., wherein the assessee acted as the Merchant Banker in respect of the stake sale to a private equity partner and the assessee was entitled to receive certain consideration for providing advisory services and to act as the Merchant Banker. It was submitted that the necessary invoices were raised on PNB Housing Finance Ltd. and income for the said services were duly recorded in the books of accounts and offered to tax during the AY 2010-11. Subsequently, a part of the amount was written off in the books of accounts as the same was found not recoverable from the debtor. It was submitted that in terms of section 36(2), the assessee can claim bad debts subject to the condition that the debt has been taken into account in computing the income of the assessee in the previous year in which such debt is written off or in an earlier previous year which has been duly complied by the assessee. It was further submitted that in so far as the satisfaction of conditions u/s. 36(1)(vii) is concerned, the assessee has actually written off the debt in its books of accounts and the same can be seen from the accounting entry passed in the books of accounts for writing off the debts. It was accordingly submitted that the assessee satisfied the necessary conditions so laid down u/s. 36(1)(vii) read with section 36(2) of the Act. It was submitted that the said claim is supported by the CBDT Circular No. 551, dated 23.01.1990, whereby the Board has explained the legislative intent behind the amendment to section 36(1)(vii) of the Act. It was submitted that the AO has misinterpreted the said circular and has held that pursuant to the said circular, the requirement on the part of the assessee proving that the debt has become bad will continue to be applicable even after the amendment. It was submitted that the same is a wrong reading of the Circular on the part of the Assessing Officer. Further, reliance was placed on the decision of the Hon’ble Supreme Court in case of TRF Ltd. v. CIT 323 ITR 397 (SC), wherein it has been held by the Hon’ble Supreme Court that after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable and it is enough where the bad debts is written off as irrecoverable in the books of account of the assessee. It was submitted that the decision of the Hon’ble Supreme Court, thereafter, has been referred to in the CBDT Circular No. 12/2016, dated 30.05.2016 and taking the same into consideration, the Board has also accepted the position and has stated that no appeals may henceforth be filed on this ground and appeals already filed be withdrawn as not pressed. It was accordingly submitted that in view of the decision of the Hon’ble Supreme Court and the Board Circular, the bad debts so written off in the books account should be allowed to the assessee.
8. The ld. DR has been heard who has relied on the order passed by the lower authorities. In this regard, our reference was drawn to the order of the ld. CIT(A) and it was submitted that during the appellate proceedings, the assessee was asked to file necessary proof of actual write-off in the books accounts. However, the assessee has not filed any party-wise ledger showing write-off of the debts. It was submitted that there has to be an individual ledger of the debtor and the debts even if it remains, it is to be shown as written off in the books accounts and only then it can constitute actual write-off and can be claimed for tax purposes. However, the assessee has not established the said fact during the assessment or the appellate proceedings and as a result, the ld. CIT(A) has confirmed the disallowance so made by the Assessing Officer.
9. In his rejoinder, the ld. AR drawn our reference to the written submissions filed before the Assessing Officer vide letter dated 18.11.2013, wherein the assessee has submitted the details of the ledger of the customer wherein the amount outstanding has been written off, the interoffice memorandum giving the rationale for writing off the bad debts and the accounting entry passed in the books accounts for writing off the bad debts. It was submitted that the said submissions were again reiterated before the ld. CIT(A), which he has failed to appreciate and take into consideration while passing the impugned order.
10. We have heard the rival contentions and perused the material available on record. Admittedly, the assessee has provided advisory and Merchant Banking services to PNB Housing Finance Limited and invoices have been raised and the income has been duly offered during the AY2010-11. During the impugned assessment year, the assessee has written off an amount of Rs. 8,67,059/- in its books of accounts and necessary accounting entries has been passed in the ledger account of the PNB Housing Finance Limited and which has been duly demonstrated before us. In light of the same, we find that the assessee has satisfied the necessary conditions in terms of section 36(1)(vii) read with Section 36(2) of the Act and following the Supreme Court decision in case of TRF Ltd (supra) which has also been accepted by the Central Board of Direct Taxes as evident from its Circular No.12 of 2016, the addition so made and sustained by the ld. CIT(A) is hereby directed to be deleted.
11. In the result, the ground no. 3 of the assessee is allowed.
12. In ground no. 4, the assessee has challenged the sustenance of disallowance of tea and coffee expenses amounting to Rs. 59,67,919/- u/s. 40(a)(ia) of the Act. During the course of hearing, the ld. AR submitted that during the year under consideration, the assessee has made payment of Rs. 59,67,919/- towards tea and coffee expenses and the same broadly consists of payments to vendors below threshold limit amounting to Rs. 21,19,917/-, reimbursements to employees amounting to Rs.18,99,026/-and payment exceeding threshold limit amounting to Rs. 19,48,922/-. It was submitted that as far as the payment of Rs. 21,19,971/- made to parties which are below the threshold limit, there is no requirement to carry out any TDS on the payments. Hence, the Assessing Officer has wrongly invoked the provisions of section 40(a)(ia) and the same be directed to be deleted.
13. Regarding payment of Rs.18,99,026/- reimbursed to the employees, it was submitted that the assessee has reimbursed these expenses incurred by its employees in the course of performance of their employment. It was submitted that where an employee is on some professional assignment or is out of office premises for official purposes, the assessee reimburses the expenses which may be incurred by its employees for refreshments etc. which is based on production of requisite documentary evidence by the employees who claims the amount as reimbursement and the necessary details were duly submitted before the Assessing Officer. It was submitted that it is a settled law that tax is deductible only in respect of payment of income or other sum comprising an element of income. However, in the present case, there is no income element reimbursed by the assessee to its employees as what has been reimbursed is the amount “actually spent” on tea and coffee in the course of employment.
14. Regarding the balance amount of Rs. 19,48,922/-, wherein the threshold has exceeded the prescribed limit, it was submitted that the catering essentially involves two elements i.e., preparing food and drink and then providing/supplying them. However, when a person purchases tea and coffee, etc., without there being any action for providing it by the vendor, it does not constitute catering and the assessee case is that what it pays, is towards purchase of tea and coffee and not for catering and therefore, it does not amount to carrying on of “work” within the provisions of Section 194C of the Act. It was further submitted that the assessee does not have any contract with these vendors as these tea vendors operate through roadside stalls and they do not have the necessary infrastructure to provide and supply beverages on a contract basis. Further, the assessee does not necessarily purchase tea/coffee from the same vendor every day. It was submitted that there exists no contract, whether oral or written from any of the parties from whom these beverages are purchased and in absence of any such contract, oral or written, the assessee cannot be fastened with liability to deduct tax and consequently, the payment so made without deduction of tax at source shall not be subject to disallowance u/s. 40(a)(ia) of the Act.
15. Per contra, the ld. DR relied on the order passed by the lower authorities. It was submitted that the assessee has incurred catering expenses and it cannot be accepted that the expenses have been incurred without any contract, written or oral, there must be some register maintained and the rates of each facility must have been fixed by the officials of the assessee company and if the rate of services are fixed, the services are availed and thereafter the payment is made, for the same and it could not be out of the purview of contract of services and the provision of Section 194C are applicable.
16. We have heard the rival contentions and perused the material available on record. Firstly, as regards reimbursement of expenses to the employees is concerned, the expenses are incurred/paid by the respective employees and thereafter, the same have been reimbursed by the assessee employer. Therefore, we find that where the expenses are incurred and payments are made by the respective employees, the person responsible for paying the sum to the third party is the individual employee and not the employer assessee and therefore, the responsibility to deduct TDS thereon cannot lies in the hands of the employer assessee unless and until it can be demonstrated that there is privity of contract which exists between the employer assessee and the third party. In the instant case, nothing has been brought on record in this regard and therefore, in absence of any material on record demonstrating the privity of contract with the assessee, the question of compliances with the TDS provisions doesn’t apply and the addition so made of Rs.18,99,026/- is hereby directed to be deleted.
17. Now, coming to the payment of Rs. 21,19,971/- to third parties vendors which are below the threshold limit, we agree with the contention of the ld AR that there is no requirement to carry out any TDS on the payments and the provisions of section 40(a)(ia) are wrongly invoked by the AO. Hence, the addition of Rs 21,19,971/- is hereby directed to be deleted.
18. Now, coming to the payment of Rs. 19,48,922/- to third parties vendors which are above the threshold limit, it is the claim of the assessee that it is a case of purchase of tea/coffee/beverages simpliciter and not a case where it has engaged the services of a caterer either in-house or outside who regulars provides beverages to the assessee and there exists no contract, whether oral or written with any of the parties from whom the beverages are purchased from time to time and in absence of any such contract, oral or written, the assessee cannot be fastened with liability to deduct tax. The case of the Revenue is that it cannot be accepted that the expenses have been incurred without any contract, written or oral, there must be some register maintained and the rates of each facility must have been fixed by the officials of the assessee company and if the rate of services are fixed, it could not be out of the purview of contract of services and the provision of Section 194C are applicable. We find that the findings of the AO are clearly on presumption and assumption that some contract exist between the assessee and the vendors where the assessee denies the same at first place. The assessee cannot be asked to prove the negative. In absence of any material on record to prove that the services in nature of catering services have been contracted and availed by the assessee, the provisions of section 194C cannot be invoked and the addition so made of Rs.19,48,922/- is hereby directed to be deleted.
19. In the result, the ground of appeal is allowed.
20. In ground no. 5, the assessee has challenged the sustenance of disallowance of hotel accommodation and meal charges amounting to Rs. 2,04,77,973/- u/s. 40(a)(ia) of the Act. In this regard, it was submitted that the assessee had paid a sum of Rs. 2,04,77,973/- to various hotels for accommodation and meal for its employees during various staff training and induction programs conducted throughout the year across the country. It was submitted that the assessee does not have any contract/agreement/arrangement with any of the hotels for providing accommodation to the assessee and as and when required, the assessee makes reservations or booking for the hotel where the accommodation is available and which offers the best rate to the assessee. Further, referring to the CBDT Circular No. 5/2002, dated 30.07.2002, it was submitted that the accommodation taken in the assessee’s case is not on regular basis since there are no earmarked rooms let out at specified rate and for specified period. In any case, the assessee does not have any “fixed” contract or agreement in pursuance of which the assessee pays charges to various hotels. It was submitted that as a regular practice, the assessee makes hotel reservations at prevailing rates as and when programmes for employees training have to take place and this practice is consistently followed from year-on-year and was accepted by the Assessing Officer in the past in as much as there was no disallowance u/s. 40(a)(ia) of the Act for non-deduction of tax at source from hotel accommodation charges. Further, the reliance was placed on the Coordinate Mumbai Benches decision in the case of Red Chillies Entertainment (P.) Ltd. v. ACIT [2025]  (Mumbai – Trib.), wherein also the rooms were hired on as and when available basis at the regular tariff rates subject to discounts as agreed at the time of the booking rooms and there was nothing on record to show that the assessee has entered into an any prior contract with the hotels for any specified rooms or rooms for any specific rates or for any specific period and in the said facts, the Coordinate Bench has held that the assessee deserve the benefit of the circular issued by the Board providing that the TDS will not be required to be made u/s. 194I of the Act.
21. The ld. DR relied on the order of the lower authorities.
22. We have heard the rival contentions and perused the material available on record. The CBDT in its circular no. 5/2002 dated 30-07-2002 has stated that the meaning of the term “rent” in section 194-I is wide in its ambit and scope and payments made to hotels for hotel accommodation taken on regular basis are covered within the said provisions. The emphasis has been laid on “accommodation taken on regular basis” and which has been explained further to mean where the earmarked rooms are taken for specified rate and specified period, or where rooms though are not earmarked but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement. In the instant case, nothing has been brought on record to this effect by the AO that there either exist either earmarked rooms for specified rate and specified period or a legal obligation exist with the hotels to provide the same as and when requested by the assessee. In contrast, another nature of transaction in form of rate contract as prevalent in the hotel industry has been referred in the aforesaid circular. In this regard, it has been provided that a contract for providing specified types of hotel rooms at pre-determined rates for specified period and where the occupancy is occasional or casual would be in nature of rate contract and where the agreement is merely in the nature of rate contract, it cannot be said that the accommodation is taken on regular basis and in such a scenario, there is no requirement to deduct tax at source on payments to hotels. The instant case relates to hotel accommodation taken on occasion of training programmes conducted by the assessee from time to time and the limited case of the Revenue is that number of rooms and facilities are fixed before the schedule of training as and when the same are conducted. The same thus falls in the category of rate contract rather than taking accommodation on regular basis and in such a situation, there is no requirement to deduct TDS u/s 194I of the Act. The decision of the Coordinate Bench in case of Red Chillies Entertainment (supra) has also taken a similar view and supports the case of the assessee. In the result, the addition so made and sustained by the ld CIT(A) amounting to Rs 2,64,45,892/- u/s 40(a)(ia) is hereby directed to be deleted. In the result, the ground of appeal is allowed.
23. In the result, the appeal filed by the assessee is disposed off in light of aforesaid directions.