Fresh Disallowance Under Section 14A Involving Debatable Exercise Cannot Be Made Under Rectification Proceedings
Issue
Whether the Assessing Officer was justified in invoking Section 154 to make a fresh disallowance of ₹35.37 lakh under Section 14A read with Rule 8D, when such disallowance requires an adjudicatory exercise and satisfaction under Section 14A(2) rather than correcting a patent or self-evident mistake.
Facts
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Scrutiny Assessment: For Assessment Year 2018-19, the assessee’s assessment was completed under Section 143(3) without making any disallowance under Section 14A, despite the presence of exempt dividend income.
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Initial Rectification: The Assessing Officer (AO) initially passed an order under Section 154 to correct an inadvertent computational error, but made no Section 14A disallowance at that stage.
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Subsequent Section 154 Action: The AO invoked Section 154 a second time and made a fresh disallowance of ₹35.37 lakh under Section 14A read with Rule 8D based on investments and exempt income on record.
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Assessee’s Challenge: The assessee challenged the AO’s jurisdiction under Section 154, contending that a Section 14A disallowance is not a patent error rectifiable under Section 154.
Decision
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Scope of Section 154: Section 154 applies strictly to mistakes that are obvious, patent, and self-evident from the record, without requiring any debatable, investigative, or deliberative exercise.
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Requirement of Satisfaction: Applying Section 14A read with Rule 8D requires the AO to examine the assessee’s claim and record subjective satisfaction under Section 14A(2), making it an adjudicatory process.
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Order Quashed: Because the AO failed to point out any obvious or self-evident mistake and instead conducted a fresh deliberative exercise, the order passed under Section 154 to the extent of making the ₹35.37 lakh disallowance was quashed in favor of the assessee.
Key Takeaways
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Strict Limit on Rectification: Rectification under Section 154 cannot be used as a substitute for reassessment or revision where an issue involves debate or statutory evaluation.
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Section 14A Application Requires Examination: A Section 14A disallowance is an adjudicatory determination governed by Section 14A(2) and cannot be treated as a mere mathematical or clerical oversight.
IN THE ITAT CHENNAI BENCH ‘C’
Family Health Plan Insurance TPA Ltd.
v.
Deputy Commissioner of Income-tax
Manu Kumar Giri, Judicial Member
and Ms. Padmavathy S., Accountant Member
and Ms. Padmavathy S., Accountant Member
IT Appeal No. 2366 (Chny.) of 2026
[Assessment year 2018-19]
[Assessment year 2018-19]
SEPTEMBER 8, 2026
Ankit Agarwal, CA for the Appellant. Ms. P. Sunanda, Sr. DR for the Respondent.
ORDER
Manu Kumar Giri, Judicial Member.- The captioned appeal filed by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the Ld. CIT(A)”], dated 25.02.2026 confirming the order passed under section 154 r.w.s. 143(3) of the Income-tax Act, 1961 (“the Act”) dated 27.03.2025 for Assessment Year 2018-19.
2. Assessee has raised the following grounds of appeal:
GROUND NO. I: RECTIFICATION ORDER U/S. 154 R.W.S. 143(3) OF THE ACT IS BAD IN LAW:-
1.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the order passed by the Deputy Commissioner of Income Tax, Corporate Circle 1(1), Chennai (“the AO”) u/s. 154 r.w.s.143(3) of the Act on the ground that the disallowance made u/s. 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (“the Rules”) directly in the rectification order is a mistake apparent from record. 1.2 The Appellant prays that it be held that the issue of disallowance u/s. 14A cannot be regarded as a mistake apparent from record and accordingly, the order passed u/s. 154 r.w.s. 143(3) of the Act be treated as bad in law and be quashed.
WITHOUT PREJUDICE TO GROUND NO. I
GROUND NO. II: DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 (“THE RULES”) AMOUNTING TO RS. 35,37,216/- IS BAD IN LAW:-
2.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance made by the AO of Rs. 35,37,216/- u/s. 14A of the Act by applying Rule 8D of the Rules. 2.2 The Appellant prays that the disallowance of Rs. 35,37,216/- u/s. 14A r.w.r. 8D of the Rules be held to bad in law and accordingly, be deleted.
WITHOUT PREJUDICE TO GROUND NO. I & II
GROUND NO. III: DISALLOWANCE U/S. 14A OF THE ACT TO BE COMPUTED ONLY IN RESPECT OF INVESTMENTS WHICH YIELDED EXEMPT INCOME:-
3.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance made by the AO of Rs. 35,37,216/- u/s. 14A of the Act r.w.r. 8D of the Rules by considering even investments which did not yield any exempt income during the year. 3.2 The Appellant prays that without prejudice to above, only investments which yielded exempt income during the year ought to be considered while calculating the disallowance u/s. 14A of the Act r.w.r. 8D of the Rules.
WITHOUT PREJUDICE TO GROUND NO. I & II
GROUND NO. IV: DISALLOWANCE U/S. 14A OF THE ACT TO BE COMPUTED BY ONLY CONSIDERING THE ACTUAL COST AND NOT THE FAIR MARKET VALUE (‘FMV’) OF INVESTMENTS WHICH YIELDED EXEMPT INCOME DURING THE YEAR:-
4.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance made by the AO of Rs. 35,37,216/- u/s. 14A of the Act r.w.r. 8D of the Rules by considering the fair market value of investments and not the actual cost of investments. 4.2 The Appellant prays that only actual cost of investments ought to be considered while calculating the disallowance u/s. 14A of the Act r.w.r. 8D of the Rules and accordingly, without prejudice to above, the disallowance made by the AO ought to be recomputed by considering only actual cost of investments which actually yielded exempt income during the year.
GROUND NO. V: GENERAL
The Appellant craves leave to add, amend, modify, rescind, supplement or alter any of the grounds of appeal stated hereinabove, either before or at the time of hearing of this appeal.
3. Facts relevant to the issue are that the assessee filed its original return of income on 27.09.2018 and revised return on 28.09.2018 declaring total income of Rs.8,95,07,700/-. The case was subsequently selected for scrutiny and assessment was completed under section 143(3) r.w.s. 143(3A) and 143(3B) of the Act vide order dated 29.03.2021. It is an admitted position that no disallowance under section 14A was made in the said scrutiny assessment.
3.1 An inadvertent addition of Rs.2,77,97,117/- had appeared in Schedule BP/computation of income. The said error was subsequently rectified by the AO under section 154 r.w.s. 143(3) vide order dated 19.08.2021 and the total income was determined at Rs.8,95,07,697/-.
3.2 Thereafter, the AO noticed from the return that the assessee had earned exempt dividend income of Rs.1,10,77,100/- and had not made any disallowance under section 14A. The AO further noticed investments in shares, including investment in Apollo Hospitals Enterprises Ltd. of Rs.1,06,26,500/- made during the year and investment in Keimed Pvt. Ltd. of Rs.34,88,51,110/- made in an earlier year. On the basis of the above, the AO proceeded to compute disallowance under section 14A read with Rule 8D at Rs.35,37,216/- and, by order dated 27.03.2025 passed under section 154 r.w.s. 143(3), determined the total income at Rs.9,30,44,913/-.
4. The assessee aggrieved by the very assumption of jurisdiction under section 154 by the AO, challenged the order u/s. 154 dated 27.03.2025 beofre the ld.CIT(A). However, ld.CIT(A) rejected the submissions of assessee and upheld the order of AO.
Now assessee is in appeal before the Tribunal.
5. The learned counsel for the assessee submitted that the impugned order is beyond the scope of section 154. It was submitted that the original assessment was a scrutiny assessment under section 143(3) and no disallowance under section 14A was made therein. According to the learned counsel, the AO, through the impugned proceedings, has not corrected any patent error but has undertaken a fresh exercise of determining the applicability and quantum of disallowance under section 14A read with Rule 8D.
5.1 It was submitted that section 14A(2) requires the AO to examine the accounts of the assessee and record satisfaction as to the correctness of the assessee’s claim before determining the expenditure in accordance with the prescribed method. Hence, the issue necessarily involves examination of facts and application of law and cannot constitute a mistake apparent from the record. Reliance was placed principally upon the judgment of the Hon’ble Supreme Court in T.S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50 (SC) and, in the context of section 14A and section 154, upon the judgment of the Hon’ble Karnataka High Court in CIT v. Mphasis Software and Services (India) (P.) Ltd. [2022] 445 ITR 468 (Karnataka). The case law paper book filed by the assessee is as under:
6. Per contra, the learned Departmental Representative (DR) supported the order of the AO. It was submitted that the assessee had earned exempt dividend income and had not made any disallowance under section 14A. The investments were available on the balance sheet and the disallowance under Rule 8D could be computed from the figures available on record. It was, therefore, contended that the omission constituted a mistake apparent from the record.
7. We have considered the rival submissions and perused the material available on record, paper book filed by the assessee. The solitary effective issue before us is whether the Assessing Officer (“AO”) was justified in invoking the limited jurisdiction under section 154 of the Act for making a fresh disallowance of Rs.35,37,216/-under section 14A read with Rule 8D, when no such disallowance had been made in the original scrutiny assessment.
8. In our considered view, the issue is required to be decided with reference to the scope of the jurisdiction under section 154, rather than by examining whether a disallowance under section 14A could otherwise have been made in a regular assessment. Section 154 empowers AO to amend an order only “with a view to rectifying any mistake apparent from the record.”
9. The expression “mistake apparent from the record” has been authoritatively explained by the Hon’ble Supreme Court in T.S. Balaram, ITO (supra). The Supreme Court held that a mistake apparent from the record must be an obvious and patent mistake and not one which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions. It was further held that a decision on a debatable point of law is not a mistake apparent from the record. The relevant extract of the Hon’ble Supreme Court in T.S. Balaram, ITO (supra) is as under:
“From what has been said above, it is clear that the question whether section 17(1) of the Indian Income-tax Act, 1922, was applicable to the case of the first respondent is not free from doubt. Therefore, the Incometax Officer was not justified in thinking that on that question there can be no two opinions, It was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under section 154 of the Income-tax Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question. In Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tirumale [1960] 1 SCR 890, this court while spelling out the scope of the power of a High Court under article 226 of the Constitution ruled that an error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on a debatable point of law is not a mistake apparent from the record-see Sidhramappa Andannappa Manvi v. Commissioner of Income-tax (1952) 21 ITR 333 (Bom.). The power of the officers mentioned in section 154 of the Income Tax Act, 1961, to correct “any mistake apparent from the record” is undoubtedly not more than that of the High Court to entertain a writ petition on the basis of an “error apparent on the face of the record.” in this case it is not necessary for us to spell out the distinction between the expressions “error apparent on the face of the record” and “mistake apparent from the record”. But suffice it to say that the Income-tax Officer was wholly wrong in holding that there was a mistake apparent from the record of the assessments of the first respondent.”
10. The principle laid down by the Hon’ble Supreme Court (supra) is not that every error committed in an assessment is incapable of rectification. The test is whether the error is self-evident and patent from the existing record, without requiring the authority to undertake a fresh process of investigation, examination or adjudication. It is in the light of this test that the impugned proceedings have to be examined.
11. In the present case, the AO has noticed that the assessee earned exempt dividend income and did not make any disallowance under section 14A. The AO has thereafter examined the investments and proceeded to calculate a disallowance under Rule 8D. In our considered opinion, this is not a case of correcting an arithmetical or clerical mistake. The AO has necessarily proceeded on the following questions:
| • | whether section 14A is attracted; |
| • | whether the assessee’s claim that no expenditure was required to be disallowed was correct; |
| • | whether the expenditure was incurred in relation to exempt income; |
| • | whether the statutory conditions for invoking section 14A(2) were satisfied; and |
| • | what amount was liable to be determined under Rule 8D. |
These are not matters which can be said to be obvious or selfevident merely from the return of income. The fact that the figures relating to dividend income and investments are available on record does not, by itself, convert the entire exercise into a mistake apparent from the record.
12. The existence of figures is one thing, the legal conclusion to be drawn from those figures is another. This aspect assumes significance because the impugned disallowance has been made under section 14A read with Rule 8D. Section 14A(2) provides that the AO shall determine the amount of expenditure incurred in relation to exempt income in accordance with the prescribed method if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee. Thus, application of Rule 8D is not an automatic consequence merely because the assessee has earned exempt income. The Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT 402 ITR 640 (SC) has explained that before applying the mechanism of apportionment, the AO is required to record satisfaction, having regard to the accounts of the assessee, that the claim made by the assessee is not correct. Therefore, in the present case, before arriving at the figure of Rs.35,37,216/-, the AO was required to undertake the statutory exercise contemplated under section 14A. That exercise itself demonstrates that the alleged error cannot be treated as a patent mistake.
13. We find that the issue is squarely supported by the judgment of the Hon’ble Karnataka High Court in Mphasis Software and Services (India) (P.) Ltd. (supra). In that case, the assessee had earned exempt dividend income and had itself made a disallowance under section 14A. The scrutiny assessment under section 143(3) accepted the returned income. Subsequently, the AO invoked section 154 and enhanced the disallowance under section 14A by applying Rule 8D. The Tribunal held that the issue was debatable and could not be rectified under section 154. The Hon’ble Karnataka High Court affirmed the Tribunal and held that the AO was required to examine the assessee’s claim having regard to the accounts and record satisfaction. The Court specifically held that recording of satisfaction under Rule 8D was mandatory and that invocation of section 154 was untenable because there was no mistake apparent from the record and the matter required adjudication. In Mphasis Software, there was already a disallowance under section 14A made by the assessee and the dispute was essentially regarding the quantum of disallowance. In the present case, there was no disallowance under section 14A at all in the scrutiny assessment. Thus, the AO has proceeded even further and has introduced a fresh disallowance through section 154. The ratio of Mphasis Software therefore applies with greater force.
14. We are unable to accept the Revenue’s argument that because the relevant figures were available in the assessment record, the omission to make a disallowance automatically became a mistake apparent from the record. If such proposition were accepted, every omission by an AO to make an addition could subsequently be characterised as a mistake apparent from the record and corrected under section 154. That would effectively convert section 154 into a power of review. Such an interpretation would be contrary to the very nature of the jurisdiction conferred by section 154. The AO has to demonstrate the mistake, and not merely the consequence which, according to him, should have followed from the facts already on record. Here, the AO has not pointed out any arithmetical mistake in the original assessment order relating to section 14A. Rather, he has made a determination under section 14A which was not made earlier. That, in our view, is a fresh adjudication and not rectification.
15. We find that aforesaid authorities referred, consistently reinforce the fundamental proposition that section 154 is attracted only where the mistake is apparent, patent and capable of being rectified without a debatable or investigative exercise.
16. There is one further feature which, in our opinion, is material. The present case was subjected to scrutiny under section 143(3). Therefore, the matter cannot be viewed as though the AO was merely correcting an automated processing error under section 143(1). The AO had undertaken a scrutiny assessment and passed an assessment order. Thereafter, the only rectification initially undertaken by the AO on 19.08.2021 concerned the inadvertent addition of Rs.2,77,97,117/- appearing in Schedule BP. Significantly, even that rectification order did not introduce any disallowance under section 14A. The AO subsequently, on 27.03.2025, invoked section 154 to make the disallowance of Rs.35,37,216/-. The chronology is therefore significant. The AO is not correcting an error in a computation which he had already made under section 14A. He is making a determination under section 14A for the first time. This distinction, in our considered view, is sufficient to take the matter outside the scope of section 154.
17. The Revenue has emphasised that the exempt income and investments were disclosed in the return and balance sheet and, therefore, the disallowance could be worked out from the existing record. We are unable to accept the proposition in this form. The question is not whether the figures were available. The question is whether the mistake was apparent. The figures of dividend income and investments may have been available. However, the conclusion that the assessee had incurred expenditure relatable to such exempt income, the rejection of the assessee’s claim, the satisfaction contemplated under section 14A(2), and the consequent determination of disallowance are matters of adjudication. Availability of material on record does not mean that every conclusion which could possibly be drawn from that material becomes a mistake apparent from the record. If the AO is required to examine and adjudicate the issue, the same cannot be undertaken under section 154.
18. We make it clear that our findings are confined strictly to the validity of the rectification proceedings.
19. On consideration of the entire matter, we hold that the impugned order suffers from a jurisdictional infirmity. The AO has failed to identify any obvious, patent and self-evident mistake in the original assessment order. Instead, the AO has undertaken a fresh exercise under section 14A read with Rule 8D. Such exercise requires examination of the assessee’s claim and satisfaction as contemplated under section 14A(2). It is therefore an adjudicatory exercise and not mere rectification. The decision of the Hon’ble Supreme Court in T.S. Balaram, ITO (supra) squarely governs the scope of section 154, while the decision of the Hon’ble Karnataka High Court in Mphasis Software and Services (India) (P.) Ltd. (supra) is directly applicable to the interaction between section 14A, Rule 8D and section 154.
20. Hence in the light of entire conspectus of matter, the order passed by the AO under section 154 r.w.s. 143(3) dated 27.03.2025, to the extent it makes the fresh disallowance of Rs.35,37,216/- under section 14A read with Rule 8D, is quashed. Consequently, the addition of Rs.35,37,216/- is deleted. The AO is directed to recompute the total income accordingly. The ground raised by the assessee is allowed.
21. In the result, the appeal of the assessee is allowed.
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