Unanswered Commission Claims and Excess Section 14A

Unanswered Commission Claims and Excess Section 14A Disallowance Restricted While 60% UPS Depreciation Allowed

Issue

Whether commission/brokerage expenses can be allowed where the Assessing Officer (AO) failed to issue Section 133(6) notices, and conversely, whether expenses should be disallowed for parties who received notices but failed to reply.
Whether Rule 8D for Section 14A disallowance applies prospectively from AY 2008-09, and what constitutes a reasonable disallowance for AY 2006-07.
Whether Uninterruptible Power Supply (UPS) units qualify for the higher depreciation rate of 60% applicable to computer systems.

Facts

Commission & Brokerage Claim (AYs 2006-07 to 2007-08): The assessee, a listed NBFC engaged in vehicle financing, claimed deductions for commission and brokerage payments. The Tribunal had previously remanded the matter, directing the AO to verify payments exceeding Rs. 3 lakhs via confirmations. In set-aside proceedings:
- The AO did not issue Section 133(6) notices to 29 parties.
- The AO issued Section 133(6) notices to other parties; some responded with confirmations, while others failed to file any reply.
Section 14A Disallowance (AY 2006-07): The assessee earned Rs. 7.61 crores in exempt dividend income. The AO applied Rule 8D retrospectively to disallow Rs. 9.75 crores (Rs. 8.91 crores interest + Rs. 83.48 lakhs administrative expenses). The CIT(A) restricted the disallowance to 3% of exempt income (Rs. 22.82 lakhs), citing surplus funds and the non-applicability of Rule 8D for AY 2006-07.
Depreciation on UPS (AY 2006-07): The assessee claimed depreciation on UPS at the higher rate of 60%, treating it as an integral part of computer systems.

Decision

Commission Expenses (Partly in favor of Assessee):
- The AO’s failure to issue notices to 29 parties implies satisfaction regarding their status, making those expenses allowable [Para 9.3].
- Commission paid to parties who received Section 133(6) notices but failed to reply is liable to be disallowed [Para 11.3].
- The AO was directed to disallow payments only to non-responsive parties and allow the remaining balance [Para 11.4].
Section 14A Disallowance (Partly in favor of Assessee):
- Confirmed that Rule 8D is prospective and applies only from AY 2008-09 onwards; hence, Rule 8D(2)(ii) interest disallowance of Rs. 8.91 crores was impermissible for AY 2006-07 [Para 16.1].
- Following Novartis India Ltd., the AO was directed to restrict the administrative expenditure disallowance to 2% of exempt income and delete the balance [Para 16.2].
Depreciation on UPS (In favor of Assessee):
- Held that Uninterruptible Power Supply (UPS) forms an integral part of computer systems and is eligible for depreciation at the higher rate of 60% [Para 17.1].

KeyTakeaways

AO’s Omission Implies Satisfaction: When an AO is directed to verify specific parties but omits issuing inquiries to a subset of them, it leads to a presumption of satisfaction regarding those parties’ credentials.
Non-Response Triggers Disallowance: Failure of recipients to respond to statutory notices under Section 133(6) justifies the disallowance of claimed expenses for lack of substantiation.
Prospective Nature of Rule 8D: Rule 8D cannot be applied retrospectively to assessment years prior to AY 2008-09. For pre-AY 2008-09 periods, disallowances for administrative costs are made on a reasonable estimate basis (e.g., 2% of exempt income).
UPS Classified as Computer Hardware: UPS devices qualify for the accelerated 60% depreciation rate alongside computer equipment because they are essential to the continuous and safe operation of computer systems.

IN THE ITAT MUMBAI BENCH ‘F’

Mahindra and Mahindra Financial Services Ltd.

Deputy Commissioner Income-tax

Sandeep Gosain, Judicial Member
and BIJAYANANDA PRUSETH, Accountant Member

IT APPEAL Nos. 5095, 5096 & 6002 (MUM) of 2025
[Assessment years 2006-07 and 2007-08]

MAY 26, 2026

Kalpesh Unadkat for the Appellant. Vivek Perampurna, CIT-DR for the Respondent.

ORDER

Bijyananda Pruseth, Accountant Member.- These three appeals two by assessee and one by the revenue emanate from the orders passed under section 250 of the Income-tax Act, 1961 (in short, ‘Act’) by the Commissioner of Income-tax, National Faceless Appeal Centre [in short, ‘CIT(A)’], Delhi, both dated 11.07.2025, for the assessment years (AY) 2006-07 and 2007-08. Since common issues are involved, with consent of both parties, the appeals were clubbed and heard together and a common order is passed for the sake of convenience and brevity. ITA No. 5095/Mum/2025 (AY 2006-07) is taken as the “lead case.”

2. The grounds of appeal raised by the assessee in ITA No.5095/Mum/2025 are as under:

“1 . On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as the ‘CIT(A)’) erred in upholding the disallowance of commission and brokerage expenses of Rs. 2,54,97,367 made by the Ld. Assessing Officer (hereinafter referred to as the ‘AO”)

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in travelling beyond the scope of issue, on which the Hon’ble Tribunal, vide order dated April 2, 2014, remitted the matter back to the Ld. AO, while observing that the Appellant has not discharged its onus by failing to provide third-party trail of actual services rendered such as contracts, invoices, delivery notes, email correspondence or work reports

3. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, while disallowing the commission and brokerage expense amounting to Rs. 2,54,97,367, the Ld. CIT(A) and the Ld. AO, failed to appreciate that out of the parties, for which the Appellant did not have confirmation amounting to Rs. 1,04,13,422, notices issued under section 133(6) of the Act were returned unserved only from 5 parties, to whom commission of Rs. 20,92,895 was paid and notices to remaining parties were duly served, establishing their identities and genuineness.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO erred in disallowing the deduction of commission and brokerage expense, merely on the ground that no reply/particular information was received from the parties, though the notices under section 133(6) of the Act were duly ‘served’ on these parties and the Ld. AO could have made further inquiries for verifying such parties.

5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO failed to appreciate that even for the parties, from whom notices under section 133(6) were returned unserved (amounting to Rs. 20,92,895), the Appellant has submitted PAN and bank account details for further verification by the Ld. AO and disallowance could not have been made merely due to non-service of notices under section 133(6), which were issued to these parties in the year 2016 ie, after more than 10-11 years from financial year 200506.

6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO failed to appreciate that some of the parties, to whom commission and brokerage was paid in financial year 200506, may not be required to retain their books of accounts for more than 6 years as per Rule 6F(5) of the Income-tax Rules, 1962 and thus, such parties could not have provided confirmations after more than 10-11 years.

7. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not granting the deduction for commission and brokerage of Rs. 1,44,07,800, based on the party-wise confirmations filed before the Ld. CIT(A), as additional evidence vide application dated September 20, 2023.

8. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the ad-hoc disallowance of commission and brokerage made by the Ld. AO.”

3. The grounds of appeal raised by the assessee in ITA No.5096/Mum/2025 are as under:

On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as the “CIT(A)’) erred in upholding the disallowance of commission and brokerage expenses of Rs. 3,38,34,108 made by the Ld. Assessing Officer (hereinafter referred to as the ‘AO’).

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in travelling beyond the scope of issue, on which the Hon’ble Tribunal, vide order dated April 2, 2014, remitted the matter back to the Ld. AO, while observing that the Appellant has not provided corroborative records such as agreements, correspondence or documentary proof of actual services rendered.

Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO erred in disallowing the deduction of commission and brokerage expense, merely on the ground that no reply/particular information was received from the parties, though the notices under section 133(6) of the Act were duly ‘served on these parties, establishing their identities and genuineness and the Ld. AO could have made further inquiries for verifying such parties.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO failed to appreciate that out of the various parties, for which the Appellant did not have confirmations and from whom notices under section 133(6) were returned unserved (amounting to Rs. 3,84,78,230), the Appellant has submitted PAN and bank account details for further verification by the Ld. AO and disallowance could not have been made merely due to non-service of notices under section 133(6), which were issued to these parties in the year 2016 i.e., after more than 9-10 years from the financial year 200607.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO failed to appreciate that some of the parties, to whom commission and brokerage was paid in the financial year 200607, may not be required to retain their books of accounts for more than 6 years as per Rule 6F(5) of the Income-tax Rules, 1962 and thus, such parties could not have provided confirmations after more than 9-10 years.

Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not granting deduction for commission and brokerage of Rs. 92,92,792 based on the party-wise confirmations filed before the Ld. CIT(A), as additional evidence vide application dated January 15, 2024.

Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the ad-hoc disallowance of commission and brokerage made by the Ld. AO.”

4. The grounds of appeal raised by the revenue in ITA No.6002/Mum/2025 are as under:

(i)

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in reduced the disallowance made by the AO u/s.14A read with Rule SD, ignoring that the assessee had earned exempt income during the year, and failed to establish that no expenditure was incurred in relation to such income.

(ii)

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate the fact that though Rule 8D was introduced w.e. f. A.Y. 2008-09, Section 14A(1) was applicable for A.Y. 2006-07, and the disallowance was rightly made on a reasonable basis by the AO, in line with judicial precedents.

(iii)

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate the fact that UPS is a power supply device and cannot be considered part of the computer system. Therefore, depreciation should be limited to 15%-25%.

5. Fact of the case, in brief, are that the assessee filed its return of income for AY 2006-07 declaring total income at Rs.187,95,00,897/-. The case was selected for scrutiny and assessment order u/s 143(3) on 15.12.2008 determining total income at Rs.207,08,66,077/- by making the following additions:(i) disallowance of depreciation on leased assets of Rs.2,28,61,453/-; (ii) disallowance u/s 14A towards interest and other administrative expenses of Rs.8,91,40,000/- and Rs.83,48,000/- respectively; (iii) excess depreciation on UPS & batteries of Rs.3,09,182/-; (iv) disallowance of expenditure on commission & brokerage of Rs.4,97,28,400/- and (v)bad debts write off disallowed of Rs.2,05,08,156/-. Aggrieved by the order of AO, assessee preferred appeal before the CIT(A), who deleted only the bad debts of Rs.2,05,08,156/-. On further appeal, the ITAT, vide an order in ITA No.1173/Mum/2011 dated 02.04.2014, set aside the assessment on the issues of 14A disallowance, depreciation on UPS, disallowance of commission and brokerage expenses and treatment of software licence and intangible assets. The AO partly allowed commission and brokerage expenses and restricted the disallowance to Rs.2,54,97,367/- from original disallowance of Rs.4,97,28,400/-. He however, repeated the other additions.

6. Aggrieved by the order of AO, the assessee have filed appeal before the CIT(A). The CIT(A) allowed depreciation on UPS but dismissed the ground on disallowance of brokerage and commission expenses. The CIT(A) partly allowed disallowance made u/s 14A r.wr. 8D and restricted the disallowance to Rs.22.82 lakhs.

7. Aggrieved by the order of CIT(A), both assessee and revenue have filed appeal before the Tribunal. We shall first take up the appeal of the assessee. The only effective ground raised by the appellant pertains to disallowance of commission and brokerage expenses of Rs.2,54,97,637/-. The Ld. AR filed a paper book and relied on various decisions to contend that the entire brokerage and commission expenses ought to have been allowed by the AO and the CIT(A). He submitted that the assessee is a listed NBFC, engaged in the business of vehicle financing, since the year 1995. In the year under appeal, appellant conducted its business through 305 branches spread all over the country manned by 2296 employees. The business disbursement (loan) for the year was Rs.4,478 Cr. under 1,31,158 new contracts. The appellant paid commission and brokerage expenditure to various car dealers and their associates, free-lancing financial consultants/professionals, etc., as a financial incentive, so that they take proactive interest in scouting for the customers, enabling the appellant to compete with its competitors, especially the banks, with low-cost funds. The Ld. AR, however, submitted that there were no formal contracts with dealers for commission and brokerage, as the same is decided on a case-to-case basis, as the payment is linked to loan sanctioned. The percentage of brokerage was in the range of 1% to 3% of the loan amount. He submitted that the commercial expediency of this expenditure was duly established before the lower authorities in first round of proceedings, whereby the AO had disallowed only the incremental commission of Rs.4,97,28,400/-, taking into account the increase in commission and brokerage expenses to Rs.23,25,82,312/- as compared to Rs.18,28,53,912/- in the preceding AY 2005-06. Hence, the AO accepted the genuineness of the expenditure.

7.1 The Ld. AR further submitted that the co-ordinate Bench of this Tribunal, in Mahindra & Mahindra Financial Services Ltd. v. Dy. CIT [IT Appeal No. 2846 (Mum) of 2007, dated 31.7.2012], restored this issue to the file of the AO, directing him to seek confirmations from the parties to whom commission and brokerage has been paid in excess of Rs.3,00,000/-. In set aside proceedings, the AO issued notices u/s 133(6) of the Act to 100 parties, to whom the assessee had paid commission of Rs.9,40,85,947/- in excess of Rs.3,00,000/- each. Based on the status of service of notices u/s 133(6) and replies of the parties, the AO allowed the deduction of Rs.2,42,31,033/- and upheld the balance amount of disallowance i.e., disallowance of incremental commission and brokerage expense of Rs.2,54,97,367/-, in his order u/s 143(3) r. w.s. 254 of the Act vide order dated 16.03.2016.

7.2 Before the CIT(A), the assessee pointed out that it had already filed the confirmations for Rs.8,15,60,154/- in respect of parties to whom commission and brokerage above Rs.3,00,000/- were paid. The assessee had also filed additional confirmations of 17 parties for Rs.1,48,79,300/- as additional evidence before the CIT(A). However, the CIT(A) has held that the confirmations filed does not discharge the onus of the assessee u/s 37(1) of the Act. In this regard, the Ld. AR submitted that both the AO and CIT(A) failed to appreciate that (i) the assessee has already provided PAN details of the parties; (ii) TDS u/s 194H has already been deducted from the payments made to the parties; (iii) all commission payments were made through account payee cheques and (iv) before on boarding any party, as per the policy, the assessee creates a separate party code after checking his KYC. The Ld. AR further submitted that the assessee faced a challenge in obtaining the confirmations from the parties for amount above Rs.3,00,000/-, since the commission payments were made in FY 2005-06 and the Tribunal passed the order on 02.04.2014, i.e., after more than 8-9 years. He submitted that the Tribunal had already considered the commercial expediency of incurring the commission and brokerage expenditure and thereafter directed the AO to seek confirmations for substantiating the identity of the recipients. Accordingly, the CIT(A) has erred in travelling beyond the scope of issue, on which the Tribunal remitted the matter to the AO.

7.3 The Ld. AR also submitted that the service of notices issued u/s 133(6) on the parties itself established identity and genuineness of parties without confirmations. He submitted that from the details of 62 parties (above Rs.3 lacs) from whom confirmations were pending, 29 parties (involving commission/brokerage of Rs.1,46,77,744/-) were not issued any notices u/s 133(6) of the Act by the AO. Therefore, the AO is presumed to have accepted the payment of commission to these 29 additions.

7.4 Further, out of 33 parties to whom notices u/s 133(6) were issued, 10 parties (commission/brokerage of Rs.70,27,293/-) duly replied to such notices, for which the AO has already granted the deduction in his order u/s 143(3) r.w.s. 254 of the Act. This proves that though the confirmations of these 10 parties were not received in the year 2008, all the parties were existing at the time of payment and thus, commission paid by appellant cannot be doubted simply due to nonavailability of confirmations.

7.5 Out of remaining 23 parties, 5 parties (commission/brokerage of Rs.24,01,620/-) replied to the notices, but sought time to provide the information. Further, 13 parties (Rs.59,18,907/-) were duly served with notices, though no replies were received from them. There were only 5 parties (of Rs. 20,92,895) from whom the notices were returned unserved.

7.6 In view of these facts, the Ld. AR submitted that although the confirmations could not be obtained by Appellant from 62 parties, the fact of service of 133(6) notices to majority of the parties itself establish the identity and genuineness of these parties. He submitted that parties without confirmations and those from whom, either notices u/s 133(6) were returned unserved or no notices u/s 133(6) were issued, could not have provided confirmations after more than 10-11 years in view of Rule 6F(5) of the Income-tax Rules, 1962. Records for such period is not required to be kept as per the said Rule.

7.7 The Ld. AR submitted that there is error in upholding ad-hoc disallowance of commission and brokerage. The AO has held that the assessee failed to prove the genuineness of the amount disallowed of Rs.2,54,97,367/-, which is nothing but a part of incremental commission and brokerage expenses disallowed in the original assessment proceedings, wherein out of the total expenses incurred of Rs.23,25,82,312/-, AO had allowed expenses of Rs.18,28,53,912/- being the expenses of the preceding year, and disallowed balance expenses of Rs.4,97,28,400/-. Thus, it was an ad-hoc disallowance. This comes to 21% of total commission and brokerage expenditure. In the impugned set aside proceedings also, the AO has granted deduction of Rs.2,42,31,033/- corresponding to parties who replied to notices u/s 133(6) confirming transactions, from the ad-hoc disallowance of Rs.4,97,28,400/- and once again made an ad-hoc disallowance of Rs.2,54,97,367, which is not permissible. He therefore, requested to delete entire disallowance.

8. On the other hand, the Ld. Sr. DR of the revenue has supported the order of lower authorities. He submitted that the AO has duly issued notices u/s 143(6) to 100 parties and status of their response has been summarized in the table at para 8.3 of the assessment order. The AO has been fair and reasonable in not making addition in respect of the parties who replied to the notices u/s 143(6). Therefore, the disallowance by AO, which was subsequently confirmed by the CIT(A), could not be faulted and needs to be upheld

9. We have heard both parties and perused the materials on record. We have also deliberated on the decisions relied upon by the Ld. AR. In the first round of litigation, the ITAT had set aside the issue to the file of the AO for fresh consideration following its order for AY 2003-04 and 2004-05 in ITA Nos.2846/Mum/2007 (AY 2003-04) and ITA No.405/Mum/2008 (AY 2004-05) dated 31.07.2012. The relevant of the order of ITAT for AY 2003-04 is as under:

“41. We have considered the rival submissions and perused the orders of Ld. CIT(A) and also the paper book submitted by the assessee. From the chart exhibited at page-46 of the paper book, we find that the assessee has given details of payment of commission and brokerage from financial year 199798 till F.Y. 2008-09. We find that no addition had been made under this head upto financial year 2001-02 which means that this is the first year where additions have been made and that too in the appellate proceedings. On perusal of the order of the Ld. CIT(A) show that the assessee was not given a reasonable opportunity to explain its case. So much so that the assessee was not even given an opportunity to reconcile the difference in the amount of confirmation received from the parties which has resulted into an addition of Rs.38,88,596/-. Further we find that the Ld. CIT(A) has simply disallowed Rs. 4,41,56,021/- in respect of parties from whom confirmations have not been received and Rs.65,93,011/- in respect of parties whose PA Nos were not available. Considering the facts and the circumstances in totality and also the year-wise chart filed by the assessee, in our humble opinion, this issue needs further verification. Therefore, in the interest of justice and fair play, we restore this issue back to the files of AD Considering the nature of business and the volume of transaction and the total number of contracts entered during the year under consideration. it is suggested that the AO may restrict its verification to the payment of brokerage and commission only of those parties where payment is made for more than one lakh after giving a reasonable opportunity of being heard to the assessee The assessee is directed to establish the identity of the details/evidences. The AO is further directed to verify the TDS details wherever it has been made. Ground No. 6 is allowed for statistical purposes.”

9.1 In the subsequent decision for AY 2006-07 and 2007-08 in ITA No.1173/Mum/2011 and ITA No.4664/Mum/2011 dated 02.04.2014, which is relevant for the impugned appeal, the ITAT set aside the issue to the file of AO with the following observation:

“26.We have considered the arguments. The issue must be verified by the AO to re-adjudicate for the sake of consistency. However, we accede to the request of the AR to increase the base of verification fixed at Rs. 1,00,000/-in the order in 2003-04, being low. We, therefore, increase the base to Rs. 3,00,000/- and above for the current year onwards.

27. We, therefore, set aside the order of the CIT(A) on this issue and direct the AO to seek confirmations from the parties to whom commission & brokerage has been paid in excess of Rs. 3,00,000/-.”

9.2 Following the direction of the Tribunal, the AO has issued notices u/s 133(6) to 100 parties and their response has been presented in a table below para 8.3 of the assessment order. The AO has noted that only 33 parties out of the 100 have replied and accordingly Rs.2,42,31,033/- corresponding to those parties were allowed as deduction. The remaining amount of Rs.2,54,97,367/-[Rs.4,97,28,400/- (-) Rs.2,42,31,033/-] was disallowed and added to the total income. The summary of the parties to whom commission paid was more than Rs.3,00,000/- and status of 133(6) notices is as under:

S.No.	Particulars	Amount (Rs.)	Amount (Rs.)	Amount (Rs.)
(a)	List of 73 parties above Rs. 3 lakh, of whom confirmations were already available on the file of the Ld. AO (in the first round of assessment proceedings)			8,15,60,154
(b)	List of 17 parties above Rs. 3 lakh, from whom confirmations are available (post first round (Additional evidences before the CIT(A))			1,48,79,300
(c)	List of 62 parties above Rs. 3 lakh, from whom confirmations were pending –
	10 parties who duly replied to the notices u/s 133(6) issued by the AO, for which the AO has already granted the deduction in second round of proceedings		70,27,293
	29 parties to whom ‘NO’ notices u/s 133(6) were issued	1,46,77,744
	23 parties to whom notices u/s 133(6) were issued, of which –
	5 parties who replied to the notices, but sought time to provide the information (Identity proved)	24,01,620
	13 parties on whom the notices got served, though no replies were received from them (Identity proved)	59,18,907
	5 parties to whom the notices were returned unserved (PAN, address and bank account details of parties as available, provided by the Appellant)	20,92,895	2,50,91,166
	Sub-total (c) (62 parties)			3,21,18,459
	TOTAL (a + b + (c) (152 parties)			12,85,57,913

9.3 It is clear from above that the assessee had given confirmations of 17 parties after the initial assessment as additional evidence before the CIT(A). The same were not accepted by the CIT(A). We do not agree with the action of the CIT(A). The confirmations, PAN, TDS details etc. were file pursuant to the directions of the ITAT. Subsequently, in the second round of litigation the AO has issued notices u/s 133(6) of the Act to 100 parties. The AO accepted Rs.70,27,293/- in respect of 10 parties who duly replied to the notices u/s 133(6). Further, the AO himself has not issued notices to 29 parties to whom brokerage and commission of Rs.1,46,77,744/- were paid. Since the AO has not issued any notice or made any enquiry, it will be reasonable to hold that the AO was satisfied about the status of these parties. Hence, commission and brokerage of Rs.1,46,77,744/- cannot be considered for disallowance. However, we find that 13 parties to whom notices were served, did not filed any reply. The amount involved was Rs.59,18,907/-. Hence, the same is liable to be disallowed. Similarly, notices issued to 5 parties (Rs.20,92,895/-) were returned unserved. Hence, the disallowance by the AO of Rs.20,92,895/- was correct. We also find that 5 parties replied to the notice u/s 143(6) and sought time to file information. However, no such information seems to have been filed and the appellant also could not file copies of such information before us. Therefore, the commission and brokerage of Rs.24,01,620/- paid to these parties is not allowable. Accordingly, the AO is directed to disallow brokerage and commission expenses of Rs.1,04,13,422/-(Rs.24,01,620/- + Rs.59,18,907/- + Rs.20,92,895/-) and allow the balance amount. The ground is partly allowed.

10. In the result, the appeal of the assessee is partly allowed.

ITA No. 5096/Mum/2025 (AY: 2007-08)

11. The facts of the instant appeal are similar to those of ITA No.5095/Mum/2025 (supra) decided above. The AO had disallowed expenditure on commission and brokerage of Rs.5,93,26,688/- in the original assessment order u/s 143(3) dated 07.12.2009. The CIT(A) in the first appellate order dated 11.03.2011 confirmed the addition by observing that similar disallowance was upheld by the CIT(A) in AY 2006-07. On further appeal, the ITAT has set aside the matter to the file AO for re-adjudication and verification of the expenses above of Rs.3,00,000/- by seeking confirmation from the concerned parties to whom commission and brokerage were paid in excess of Rs.3,00,000/- each. In the set aside proceedings, the AO has made similar enquiry as was done in AY 2006-07 and issued notices u/s 133(6) of the Act to 100 parties. The outcome of the notices issued u/s 133(6) to such parties are given in the tabular form in para 8.3 of the assessment order. The AO reduced the disallowance of Rs.2,54,92,580/-corresponding to the parties who had confirmed the transactions in their replies to the notices u/s 133(6) of the Act. The balance amount of Rs.3,38,34,108/-(Rs.5,93,26,688 – Rs.2,54,92,580) was disallowed by the AO. On appeal, the CIT(A) has sustained the disallowance of Rs.3,38,34,108/- by observing that the confirmations filed as additional evidence covers only a fraction of the claim and do not include corroborative records such as agreements, correspondence or documentary proof of actual services rendered.

11.1 In the proceedings before us, the Ld. AR of the appellant as filed similar submission as was made for AY 2006-07. The appellant has made an application for admission of additional evidence vide letter dated 22.01.2026. The said evidence pertains to the impugned regarding partial disallowance of commission and brokerage. The additional evidence relates to certain documents of a party, namely, Geetanjali Enterprises, to whom commission of Rs.3,32,48,476/- was paid in the subject AY. It is submitted by the appellant that the commission was paid to the above party in succeeding two AYs also. Hence, the identity of the party is established. The Ld. AR submitted the following documents as additional evidence: (i) Partnership deed dated June 28, 2005 of Geetanjali Enterprises; (ii) PAN card copies of Geetanjali Enterprises and its partners; (iii) PAN status with AO details of Geetanjali Enterprises; (iv) Passport copies of partners of Geetanjali Enterprises; (v) proof of liquidation proceedings filed against Global Gallarie Agencies Pvt Ltd, an entity in which partner of Geetanjali Enterprises, Mr. Sunitkumar Tilakraj Malhotra, is one of the directors; (vi) relevant extracts of directorship details of Global Gallarie Agencies Pvt Ltd available in public domain on MCA portal; (vii) confirmations received from Geetanjali Enterprises for AYs 2008-09 and 2009-10.

11.2 The Ld. Sr. DR submitted that the Bench may decide the matter as it thinks fit.

11.3 We have considered the request of the appellant for admission of the additional evidence in respect of Geetanjali Enterprise. Rule 29 permits ITAT to admit additional evidence for any substantial cause. The intention behind the Rule is that substantial justice should be done and the interest of justice should be the overriding consideration. Considering the facts in totality, the additional evidence is admitted. However, it may be stated that the same would not come to the rescue of the appellant because the confirmation for the subject AY 200708, as directed by the ITAT in its order in ITA No.4664/Mum/2011 (supra), has not been filed. The appellant has filed confirmation of the succeeding two AYs which are not relevant for deciding the ground in the present appeal.

11.4 Coming back to the issue under discussion, it has already been noted that the AO has already reduced the disallowance by Rs.2,54,92,580/- in respect of the parties who had filed the confirmations during the set aside proceedings before him. The other parties have not made any compliance to the notices issued by the AO u/s 133(6) of the Act and have not filed confirmations of the commission and brokerage received by them, as directed by the Tribunal in its order in ITA No.4664/Mum/2011 dated 02.04.2014. Therefore, the addition of Rs.3,38,34,108/- made by the AO, after reducing Rs.2,54,92,580/- in the set aside proceedings, which has since been affirmed by the CIT(A), does not require any interference. The ground is accordingly dismissed.

12. In the result, the appeal of the assessee is dismissed.

ITA No.6002/Mum/2025 (AY: 2006-07)

13. Ground No.1 of the appeal filed by the revenue pertains to disallowance made by the AO u/s 14A r.w.r. 8D of the Act. The assessee had earned exempt dividend income of Rs.7,60,57,663/-. The AO has made disallowance of Rs.9,74,88,330/- including (i) interest expenses of Rs.8,91,39,975/- under Rule 8D(2)(ii) and (ii) other administrative expenses of Rs.83,48,355/- under Rule 8D(2)(iii). In the first round of appeal, the CIT(A), following the decision of the Hon’ble Bombay High Court in case of CIT v. Godrej Arovet Ltd. [IT Appeal No. 934 of 2011, dated 8-1-2013], restricted the disallowance u/s 14A to 10% of the dividend income of Rs.7,60,57,663/- amounting to Rs.76,05,766/-. On further appeal, the ITAT in its order dated 02.04.2014 (supra), directed AO for fresh adjudication as per the ratio of the Hon’ble Bombay High Court in case of CIT v. Reliance Utilities & Power Ltd. 313 ITR 340 (Bombay) and Godrej Agrovet Ltd. (supra). However, in the set aside proceedings, the AO again disallowed the same amount of Rs. 9,74,88,330/- u/s 14A r.w.r. 8D. On appeal, the CIT(A) restricted the addition to 3% of the exempt dividend income at Rs.22,81,730/-. The CIT(A) followed the direction of the Tribunal and appreciated that there were sufficient surplus funds which would justify the investments made from the interest free fund.

14. Aggrieved by the order of CIT(A), the revenue has filed the present appeal. The Ld. Sr. DR supported the order of AO and submitted that the CIT(A) was not correct in restricting the disallowance to 3% of the exempt dividend income. He submitted that the AO has rightly applied Rule 8D and made the disallowance.

15. On the other hand, the Ld. AR supported the order of CIT(A). He submitted that the AY under appeal being AY 2006-07, Rule 8D cannot be applied because it was applicable from AY 2008-09 onwards. For this, the Ld. AR relied on the decision of the Hon’ble Bombay High Court in case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 328 ITR 81 (Bombay). He further submitted that in the following decisions, the disallowance to the extent to 2% of the exempt income has been sustained: (i) Godrej Agrovet Ltd. (supra); (ii) DCIT/ACIT v. Novartis India Ltd. (Mumbai – Trib.)and (iii) Deutsche Equities India (P.) Ltd. v. Addl. CIT [2024] (Mumbai – Trib.).

16. We have heard both parties and perused the materials on record. We have also deliberated the decisions relied upon by the Ld. AR. During the year under consideration, the appellant had earned exempt dividend income of Rs.7,60,57,663/-. As per the balance sheet, the assessee had equity shares of Rs.54.76 lakhs and mutual funds of Rs.29,509.50 Lakhs. The AO applied Rule 8D and disallowed Rs.9,78,88,330/- which was more than the exempt income. In the second round of litigation, the CIT(A) held that the AO has not recorded satisfaction before applying Rule 8D. He also held that Rule 8D cannot be applied to the year under consideration i.e. AY 2006-07. However, he disallowed the 3% of the exempt income amounting to Rs.22.82 Lakhs. The finding of the CIT(A) is as under:

“Upon scrutiny, it is found that the AO has applied Rule 8D mechanically without satisfying the statutory precondition of recording dissatisfaction based on the assessee’s accounts. This procedural lapse, especially when read with the binding judgment of the Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [(2010) 328 ITR 81], renders such application legally untenable. The year under appeal is AY 2006-07 a period for which Rule 8D did not have retrospective applicability. The disallowance made on that basis thus cannot be sustained.

However, the assessee’s blanket assertion that no disallowance is warranted is not fully supported by the record. No detailed fund flow statement, managerial resource allocation, or contemporaneous explanation has been provided to demonstrate that no indirect expenditure was incurred in earning exempt income. It is judicially settled that even in the absence of specific borrowing or direct cost, some proportion of administrative expenditure such as time spent by senior staff, record maintenance, compliance oversight may fairly be attributed to investment activity.

In this context, several authoritative rulings offer guidance. In CIT v. Hero Cycles Ltd. [(2015) 379 ITR 347 (SC)], the Hon’ble Supreme Court held that only those expenses with a proximate nexus to exempt income can be disallowed. In PCIT v. UTI Bank Ltd. [(2021) 438 ITR 689 (Bom)], the Hon’ble Bombay High Court reiterated that Rule 8D cannot be applied without first recording dissatisfaction, and disallowance must rest on objective analysis of accounts. Most notably, in Maxopp Investment Ltd. v. CIT [(2018) 402 ITR 640 (SC)], the Hon’ble Supreme Court held that though Section 14A applies even when investments are from mixed funds, the quantum of disallowance must be based on a realistic assessment of effort and resources, and not on mechanical formulae.

In addition, the Mumbai ITAT in J.K. Investors (Bombay) Ltd. v. ACIT [ITA No. 7858/Mum/ 2011] recognized that in the absence of clear and specific cost attribution, a nominal disallowance of 1% to 2% of exempt income may be justified. The Tribunal cautioned against excessive or formulaic disallowance, particularly where own funds are available and there is no evidence of borrowing for investments.

Applying these principles to the present case, and acknowledging that some indirect expenditure is inherent in managing investment portfolios, it would be reasonable to allow a proportionate disallowance under section 14A(1). Considering the scale of exempt income and the absence of granular data on administrative inputs, a disallowance of Rs. 22.82 lakh, being 3% of the exempt income, is deemed fair, balanced, and judicially sustainable.

Accordingly, the disallowance is restricted to Rs. 22.82 lakh, and the balance is deleted. This ground is therefore partly allowed.”

16.1 We do not find any infirmity in the order of CIT(A) to the effect that provisions of Rule 8D are not applicable for AY 2006-07. The Hon’ble Jurisdictional High Court in case of Godrej and Boyce Mfg. Co. Ltd. (supra) has held that Rule 8D is prospective in nature and would be inapplicable to the AYs prior to 200809. The Hon’ble Supreme Court in case of Maxopp Investment Ltd. v. CIT [2018] (SC) has also held that Rule 8D is applicable from AY 2008-09 onwards. Hence, the application of Rule 8D and disallowance of interest expenses of Rs.8,91,39,975/- under Rule 8D(2)(ii) is not permissible for the year under appeal. Having held that the interest disallowance is not permissible, let us consider as to whether the disallowance @3% at the exempt income by the CIT(A) is justified. The Ld. AR relied on the decisions in case of Novartis India Ltd., Godrej Agrovet Ltd. and Deutsche Equities India Pvt. Ltd. and requested that 2% of the exempt income may be disallowed. We find that the co-ordinate Bench of this Tribunal in case of Novartis India Ltd. (supra) confirmed disallowance to the extent of 2% by observing as under:

“10. The assessee had earned exempt income and hence the disallowance is required to be made u/s 14A of the Act. However, the provisions of Rule 8D has come into effect from AY 2008-09 onwards and hence in the earlier years, the provisions of Rule 8D cannot be applied as held by Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 328 ITR 81 (Bombay). We notice that the co-ordinate bench in the case of Godrej Agrovet Ltd v. ACIT [IT Appeal No. 1629 (Mum.) of 2009, dated 17-9-2010] has confirmed disallowance u/s 14A to the extent of 2% of the dividend income and the same has been upheld by Hon’ble Bombay High Court in CIT v. Godrej Arovet Ltd. [IT Appeal No. 934 of 2011, dated 8-1-2013] in the very same case.

10.1 We notice that the Ld CIT(A) has confirmed disallowance to the extent of 2% of dividend income in AY 2004-05. Hence, his order does not call for any interference. In AY 2006-07, the ld CIT(A) has directed the AO to disallow such percentage of dividend income as applied in the earlier years. We modify the said order of Ld CIT(A) and direct the AO to disallow 2% of the dividend income. In AY 2007-08, the AO and Ld. CIT(A) has applied the provisions of Rule 8D, which is contrary to the decision rendered by Hon’ble Bombay High Court in the case of Godrej Boyce Mfg. Co. (supra). Accordingly, we set aside the order passed by Ld CIT(A) on this issue in AY 2007-08 and direct the AO to restrict the disallowance u/s 14A to 2% of the dividend income.”

16.2 Following the above decision, we confirm the decision of CIT(A) regarding non-applicability of Rule 8D(2)(ii) for the subject assessment year 2006-07. However, the AO is directed to disallowed 2% of the exempt income amounting to Rs.15,21,153/- and delete the balance amount. The ground of revenue is dismissed.

17. The next ground is pertaining to depreciation on UPS. The revenue has contended that it should be restricted to 15% instead of claim of 60% by the appellant on the UPS units. The CIT(A) has accepted depreciation @60% on the UPS equipment with computer systems. The relevant part of his order is as under:

“The assessee claimed depreciation at the enhanced rate of 60% on UPS units, contending that these are integral components of the computer systems to which they are attached. The Assessing Officer, however, granted depreciation at 15% on the ground that UPS are standalone electrical devices not covered under the definition of ‘computer’ for the purposes of depreciation. INCOME Upon a detailed review of classification and supporting technical documentation, it is found that the UPS units are exclusively used to support the operations of computers by providing uninterrupted power supply and voltage stabilization. This ensures the protection of data and prevents system failures, which are essential for financial services operations reliant on real-time computer systems.

Judicial precedents have consistently upheld the higher depreciation rate for such integrated IT equipment. In CIT v. BSES Yamuna Power Ltd. [(2013) 358 ITR 47 (Del)], the Hon’ble Delhi High Court held that UPS, being essential to the functioning of computer systems, should be classified under ‘computer peripherals’ and thus eligible for 60% depreciation. Similar views were taken by various benches of the ITAT in favour of taxpayers.

Considering the nature and functional integration of the UPS equipment with computer systems in the present case, and applying the legal principles laid down by higher judicial forums, the claim of the assessee is found to be in order. The depreciation rate of 60% is hereby accepted. This ground is accordingly allowed.”

17.1 The CIT(A) has allowed depreciation @60% by relying on the decision of the Hon’ble Delhi High Court in case of BSES Yamuna Power Ltd. (supra). The Ld. Sr. DR has not been able to bring on record anything contrary on fact or in law. Hence, we do not find any infirmity in the order of CIT(A), which we confirm. Accordingly, the ground is dismissed.

18. In the result, the appeal of the revenue is dismissed.