Section 14A disallowance applies only to exempt-income-yielding

Section 14A disallowance applies only to exempt-income-yielding investments, and duplicate additions are impermissible.

Issue

Whether disallowance under Section 14A read with Rule 8D is to be computed considering only investments that yielded exempt income during the year.
Whether an addition made under Section 69A treating Japanese Yen receipts as unexplained money is sustainable when the taxpayer has fully accounted for and offered the funds to tax.
Whether an addition under Section 36(1)(va) read with Section 2(24)(x) can be sustained when the Assessing Officer makes a duplicate disallowance of an amount already disallowed suo motu by the taxpayer.

Facts

Section 14A Disallowance: During AY 2011-12 assessment under Section 143(3) read with Section 144C, the Assessing Officer (AO) computed an additional disallowance of ~₹3.99 crores under Section 14A read with Rule 8D. On appeal, the CIT(A) directed the AO to re-calculate the disallowance by taking into account only those investments that actually yielded exempt income, after necessary verification.
Section 69A Addition: The AO treated foreign currency receipts equivalent to ~₹1.01 crores in Japanese Yen (JPY) as unaccounted/undisclosed income under Section 69A. The taxpayer demonstrated that all JPY receipts received from its Japanese subsidiary were fully recorded in its books of account and offered to tax in its return. The CIT(A) deleted the addition as the AO failed to provide any basis or justification.
Section 36(1)(va) Disallowance: The AO disallowed ~₹12.09 lakhs for delayed deposit of employees’ contributions to welfare funds. However, this sum included ~₹1.82 lakhs that the taxpayer had already suo motu disallowed in its tax return, resulting in double disallowance. The CIT(A) deleted the duplicate ~₹1.82 lakhs addition while sustaining the balance ~₹10.27 lakhs.

Decision

Section 14A Disallowance: Held in favour of the assessee. The CIT(A)’s direction to recompute the Section 14A disallowance exclusively with reference to investments yielding exempt income—while giving the AO due opportunity for verification—was legally sound and called for no interference.
Section 69A Addition: Held in favour of the assessee. Since the taxpayer proved that all JPY receipts from its subsidiary were properly accounted for and offered to tax, and the AO failed to substantiate any basis for the addition, the deletion of ~₹1.01 crores was justified.
Section 36(1)(va) Disallowance: Held in favour of the assessee. The deletion of the ~₹1.82 lakhs duplicate addition was based on verified facts showing prior suo motu disallowance, leaving no room to interfere with the CIT(A)’s finding.

Key Takeaways

Section 14A Scope Restricted to Income-Yielding Assets: Section 14A disallowance cannot be applied across the entire investment portfolio; it must be restricted strictly to investments that produced exempt income during the relevant financial year.
No Section 69A Addition for Disclosed Income: An addition under Section 69A for unexplained money cannot stand when the taxpayer provides documentary evidence that foreign receipts are accounted for and taxed.
Prevention of Double Disallowance: Tax authorities cannot penalise a taxpayer twice by re-disallowing expenditures or statutory contributions that the taxpayer has already disallowed suo motu in its return of income.

IN THE ITAT AHMEDABAD BENCH ‘D’

ACIT

Zydus Lifesciences Ltd.^*

Dr. B.R.R. Kumar, Vice President
and Sanjay Kumar, Judicial Member

IT Appeal No. 557 (AHD) OF 2026
[Assessment year 2011-12]

SEPTEMBER 3, 2026

R.V. Aroon Prasaad, CIT-DR for the Appellant. Mukesh Patel, Jigar M. Patel and Ajit Kumar Jain, ARs for the Respondent.

ORDER

Sanjay Kumar, Judicial Member. – This appeal has been filed by the Assessee against the order dated 23.12.2025 passed by the Ld. Commissioner of Income Tax (Appeals), Ahmedabad-13 (hereinafter referred to as ‘Ld. CIT (A)’ in short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’ in short) for Assessment Year 2011-12.

2. The Revenue in the present appeal has raised following grounds of Appeal:-

“1)

“The Ld. CIT(A) erred in law and on facts in deleting the adjustment/addition of Rs. 18,95,02,413/-on account of the guarantee fee charges.

The Ld. CIT(A) erred in law and on facts in holding that a guarantee did not a service u/s 92C of the Act and the same does not required to be benchmarked.

The Ld. CIT(A) erred in law and on facts in holding that the transaction of the providing corporate guarantee have resulted in increases the asset base and tax base in India and hence no adjustment warranted which is contrary to the provisions of section 92B and Rule 10B & 10C of Income Tax Rules.

The Ld. CIT(A) erred in law and on facts in deleting the adjustment/addition of Rs. 9,38,03,720/-on account of interest on convertible loans.

The Ld. CIT(A) erred in law and on facts in holding that the transaction of interest on convertible loans have resulted in increases the asset base and tax base in India and hence no adjustment warranted which is contrary to the provisions of section 92B and Rule 10B & 10C of Income Tax Rules.

The Ld. CIT(A) erred in law and on facts in deleting the disallowance of Rs.7,23,13,636/ made u/s 40(a)(i) of the Act, without examining the taxability of payments made to non-residents under section 195 and the applicable DTAA provisions.

The Ld. CIT(A) erred in law and on facts in treating the product registration expenditure as revenue in nature, disregarding the AO’s finding that it created enduring business/commercial rights qualifying as intangible assets u/s 32(1)(ii).

The Ld. CIT(A) erred in deleting the addition of Rs. 7,50,24,581/- by incorrectly treating trademark and patent registration fees as revenue expenditure and erred to appreciate that such registration confers exclusive statutory rights, constituting intangible assets eligible only for depreciation u/s 32(1)(i), and not full revenue deduction.

The Ld. CIT(A) erred in in law and on facts by allowing weighted deduction u/s 35(2AB) without verifying whether the expenditure was incurred within the approve in-house R&D facility and certified by DSIR and also ignored the mandatory requirement of Form 3CL certification and failed to reconcile the claimed amount with the DSIR-approved expenditure.

10)

The Ld. CIT(A) erred in law and on facts in allowing depreciation on a vehicle registered in the name of a director, without establishing the assessee’s legal or beneficial ownership u/s 32.

11)

The Ld. CIT(A) erred in law and on facts in directing re-computation of disallowance u/s 14A r.w. Rule 8D by excluding investments in foreign companies on the erroneous ground that dividends there from are taxable and also erred to appreciate that Rule 8D applies to all investments that could potentially yield exempt income, not only those that actually yielded such income in the relevant year.

12)

The Ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 170 crores by misinterpreting the proviso to section 28(v) and also erred in verifying whether the identical sum was conclusively disallowed in the firm’s assessment for AY 2011-12, as required under law.

13)

The Ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 1,00,83,884/-without independent verification of the unexplained JPY receipt and also erred to examine bank statements, FIRCs, and ledger accounts to reconcile the specific receipt of JPY 2,10,08,091.

14)

The Ld. CIT(A) erred in law and on facts in partially deleting the disallowance of delayed PF/ESI deposits without contribution-wise verification of due dates and deposit dates.

15)

The Ld. CIT(A) erred in law and on facts in treating the MAT computation as settled without first determining the correct income under normal provisions.

16)

The Revenue craves leave to add/alter/armed and/on substitute any or all of the grounds of appeal.”

3. The present appeal arises out of the assessment order dated 21.05.2015 by DCIT-1(1)(2), Ahmedabad passed u/s 143(3) r.w.s. 144C of the Income-tax Act, 1961 and pursuant impugned order passed by ld. CIT(A).

4. We have heard the parties and perused the records.

5. Ld. CIT-DR has relied upon the orders of the Assessing Officer (hereinafter referred to as “the AO”) during his argument; on the other hand, Ld. AR appearing for the Assessee submits that the majority of the grounds urged in the present appeal preferred by the Revenue have already been decided against the department in the case of the Assessee itself for earlier Assessment Years. He has submitted the ground-wise status of the issues involved as under:

Ground No.	Department’s Ground of Appeal in Brief	Assessee’s Submission in Brief
1., 2. & 3.	Deleting the adjustment / addition of Rs. 18,95,02,413 on account of guarantee fee charges.	Decided against the yevenue by th’s Tribunal in Aesessee’s own casefor AYs. 2009-10 & 2010-1l and AYs. 2012-13 to 2015-16
4. & 5.	Deleting the adjustment / addition of Rs.9,38,03,720 on account of interest on convertible loans.	Decided byainst the Revenue by this Tribunal in Assessor’s own caseforAYs. 2008-09 to 2010-AY & AYs 2012-13 to 2015-16.
6.	Deleting the disallowance of Rs. 7,23,13,636 made u/s. 40(a)(ij of the Act in connection with payments made to non-residents.	yecided against the yevenue by thie Tribunal and ronfirmed by the Hon’ble Gujarat; High Court in Assessee’s own case for AY 2010-11
7.	Product Registration Expenses & Product Registration Support Service Expenses totalling to Rs. 4,76,50,367/- and its allowability as Revenue Expenditure.	yecided against the yevenue by th’s Teibunal in Aesessee’s own case for AYs 2006-07 to 2010-Yl and AYs 2012-13 to 201617.
8.	Trademark Registration Fees & Patent Fees of Rs. 7,50,24,581/- and its allowability as Revenue Expenditure.	Decided against the Revenue by this Tribunal in Assessee’s own case for AYs 2006-07 to 2010-11 and AYs 2012-13 to 2016-17.
9.	Eligibility for weighted deduction u/s. 35(2AB) in connection with R&D expenses of Rs. 49,01,78,197/-.	decided against the revenue by this Tribunal in Aesessee’s own case for AYs 2006-07 to 2010-1l asd AYs 2012-13 to 2016-17.
10.	Depreciation on Hummer Car of Rs. 10,75,499/-.	Deeided in favour of the assecsse in its own case before Guj HC-Pr. CIT v. Cadila Healthcare Ltd. [2019] 104 taxmann.com 78.
11.	Additional Disallowance of Rs. 3,98,65,292/-u/s. 14A.	–
12.	Addition by AO for partner’s remuneration of Rs. 170 crores.	Decided byainst the Revenue by this Tribunal in Assessee’s own crseYor AY 2012-13.
13.	Deleting addition of Rs. 1,00,83,884/-r epresen ting income received in Japanese Yen treated by AO as unaccounted income.	–
14.	Deleting disallowance of Rs. 1,82,469/- out of the total addition of Rs. 12,09,355/- under Section 36(1)(va) rws 2(24)(x).	–

Grounds No.1 to 10 and 12:

5.1 Ld. AR submits that the issues above are covered against the Revenue. This fact has not been disputed by the ld. CIT-DR. As the facts of the present year is not different from the facts obtained in previous Assessment Years covering the issue remains the same has not been disputed by the Ld. CIT-DR. Accordingly, Ground Nos. 1 to 10 and 12 urged by the Revenue are dismissed, respectfully following the earlier decisions as detailed above.

5.2 This leaves us with Ground Nos. 11, 13, and 14, to be adjudicated.

Ground No. 11:

6. In Ground No. 11, the issue involved is additional disallowance of Rs. 3,98,65,292/- u/s 14A of the Act. Ld. CIT(A) has decided this issue as follows:

“10.5 I have carefully perused the facts of the case, grounds of appeal, impugned AO/TPO order, submission uploaded by the appellant and judicial decision relied upon by the appellant. Having considered the facts of the case and the aforesaid submissions of the appellant, I find that the contention of the appellant is correct and justified, keeping in view the provisions of section 14A, which can be invoked only in respect of investments which yield income which is exempt from income-tax. The contention of the appellant is that while computing the disallowance u/s. 14A read with rule 8D, AO has wrongly taken the value of foreign investments made with Zydus International Pvt. Ltd. And Onconova Therapeutics USA as income arises from investments made with these companies being dividend received from the foreign companies are taxable. The computations submitted on record clearly show that the AO erred in computing disallowance under Rule 8D even in respect of the investment in shares of foreign companies, the dividend income from which is liable to tax.

10.6 In view of the above factual matrix of the case, AO is directed to recompute the disallowance made u/s. 14A r.w.r. 8D of the Act taking into consideration only the eligible investments which yield exempt income and accordingly additional disallowance may be computed on this issue after due verification of records. During verification process, proper opportunities of being heard should be given the appellant. Hence, Ground No.7raised by the appellant is partly allowed.”

6 .1 We do not find any infirmity in the reasoning given by Ld. CIT(A). Additionally, the AO has been given opportunity to verify the correctness of the claim made by the Assessee by the ld. CIT(A) by way of setting aside the matter to the AO to review after taking into consideration eligible investments which yielded exempt income. Hence, the Ground No. 11 raised by the Revenue is, therefore, dismissed.

Ground No. 13:

7 . Ground No. 13 relates to deletion of Rs. 1,00,83,884/- representing income in Japanese Yen (JPY) treating as unaccounted income. Ld. CIT(A) has decided this issue as follows:

“12.9 I have carefully perused the facts of the case, grounds of appeal, impugned AO/TPO order and submission uploaded by appellant. Havingconsidered the facts of the case and the aforesaid submissions of the appellant, I find force in the submissions of the appellant. On due verification of the facts on record, it is evident that the AO has not been able to support or justify by way of any evidence, the source or basis for treating the amount of Rs.1,00,83,884/- (JPY 2,10,08,091) as undisclosed income, although a specific opportunity was given to him to produce the same under his remand report.

12.10 On the other hand, the appellant has logically explained that all its receipts in JPY from its subsidiary Zydus Pharma Japan have been duly accounted and offered to tax in its Return of Income. Appellantalso having pointed out that such receipts in JPY in fact aggregate to amounts higher than what the AO had mentioned in his show cause notice and therefore, there was no justification in making the alleged addition, more so by way of undisclosed income. The appellant had duly discharged its onus of explaining the receipts in JPY reflected in its books of accounts and under the circumstances there is no case for invoking the provision of unexplained credit. HE TAX DEPAR

12.11 In view of the above factual matrix of the case, AO is directed to delete the addition of Rs.1,00,83,884/-treating the receipt of Royalty in Japanese Yen as unaccounted income of the appellant. Hence, Ground No.9raised by the appellant is allowed.”

7.1 Ld. CIT(A), after considering submissions of the Assessee as well as objections raised by the AO as per the facts on record, came to the conclusion that all its receipts in JPY from its subsidiary Zydus Pharma Japan have been duly accounted and offered to tax in its return of income. On the other hand, the AO in its remand report was not able to support or justify the source or basis for treating the amount of Rs. 1,00,83,884/- (JPY 21,08,091/-) as undisclosed income despite the opportunity provided to him by way of remand. Revenue could not dispute this finding of fact recorded by ld. CIT(A).

7.2 In view of the aforesaid circumstances, we are not inclined to interfere with the decision of Ld. CIT(A) on this issue and hence, the Ground No. 13 raised by the Revenue is dismissed.

Ground No. 14:

8. Ground No. 14 relates to disallowance of Rs. 1,82,469/- out of total additional amount of Rs. 12,09,358/- u/s 36(1)(va) read with Section 2(24)(x). Ld. CIT(A) has decided this issue as under:

“13.9 I have carefully perused the facts of the case, grounds of appeal, impugned AO/TPO order, submission uploaded by the appellant and judicial decision relied upon by the appellant. On due consideration of the same, I hold that there should not be any dispute in regard to the amount of Rs.1,82,469/-which has already been disallowed by the appellant, but stands repeated in the disallowance made by the AO. Therefore, I hold that the appellant is entitled to relief for this ground to the extent of Rs.1,82,469/-.

allowed to an 13.10As regards the balance of Rs. 10,26,886/-, it is not disputed that the date of clearance for the said payments was beyond the grace period employer. While the appellant has attempted to rely on the CBDT circular and decision of Madras High Court (supra) in support of its contention that the date of tender should be considered as the valid date upon realization of cheque, I find that the above are in regard to the general provisions for treatment of tax being paid in time and for purposes of computation of penal interest under the provisions of the Act. They specifically do not deal with the provisions of section 36(1)(va) and therefore, the contention of the appellant does not squarely cover the dispute before me.

13.11In view of the above factual matrix of the case, AO is directed to delete the addition of Rs.1,82,469/- which has already been disallowed suo-moto by the appellantunder section 36(1)(va) r.w.s. 2(24)(x) of the Act. The balance amount of Rs. 10,26,886/-, which has been deposited late by the appellant is rightly disallowed by the AO and addition is sustained. Hence, Ground No.10 raised by the appellant is partly allowed.”

8.1 Ld. CIT(A) on facts has held the addition of Rs. 1,82,468/- although suo motu disallowed by the Assessee, however, Ld. AO had made the same disallowance in his Assessment Order. This being a finding of fact, we are not inclined to interfere with the findings of the Ld. CIT(A). Accordingly, the Ground No. 14 raised by the Revenue is dismissed.

Ground No. 15 and 16:

9. Ground No. 15 and 16 are general in nature and requires no adjudication. MAT computation will be settled in terms of income assessed under normal provisions.

10. In the result, the appeal filed by the Revenue is dismissed.