Facts of the Case:
The assessee filed its return of income for AY 2016-17 declaring total income of Rs. 23,11,834/. The case was selected for scrutiny and assessment was completed under section 143(3) of the Act. In the return of income, the assessee suo-motu disallowed the expense of Rs. 18,28,62,017/- crores relating to the income which is not part of the total income under section 14A read with rule 8D(ii) of the Income-tax Rule, 1962 (the “Rule”) i.e., treating the same as expenditure relating to exempt income. However, during the assessment proceedings the assessee submitted that It had not earned any exempt income during the relevant assessment year, and the disallowance under section 14A was erroneously made due to incorrect professional advice. The Assessing Officer rejected the assessee’s claim and applied Rule 8D, thereby computing total disallowance of Rs. 43,23,20,191/-, out of which after adjusting the assessee’s suo motu disallowance, an additional disallowance of Rs. 24,94,58,174/- crore was made to returned income. The Ld. CIT(A) upheld the action of the Assessing Officer by rejecting the submission of the assessee. Aggrieved by the same, the assessee filed an appeal before the Hon’ble Income Tax Appellate Tribunal (ITAT).
Contention of Assessee:
- The Assessee contended that no exempt income earned during the year and therefore disallowance under section 14A is not warranted.
- The Assessee contended due to wrong advice from a tax consultant it has disallow Rs.18,28,62,017/- under section 14A of the Act and the assessee wish to withdraw the same.
Contention of Revenue:
- The Revenue contended that assessee itself accepted that certain expenditure related to exempt income by making a suo motu disallowance under section 14A.
- The Revenue further contended that the Ld.AO correctly computed disallowance as per Rule 8D, since the assessee had incurred interest expenditure relating to investments.
- The Revenue also contended that it relied on CBDT clarification stating that section 14A disallowance may apply even if exempt income is not earned in a particular year.
Ruling:
The Tribunal in this two-fold issue raised by the assessee held that an assessee is entitled to withdraw an incorrect disallowance during assessment proceedings. The decision of the Coordinate Bench of the ITAT Mumbai, squarely covered in the case of M/s. Aditya Birla Nuvo Ltd. in Aditya Birla Nuvo Ltd. Therefore, the Tribunal deleted the disallowance of Rs. 18,28,62,017/-.
The Tribunal further observed that it was an undisputed fact that the assessee had not earned any exempt income during the relevant year. Therefore, section 14A read with Rule 8D cannot be invoked. Following the Coordinate Bench of the ITAT Mumbai the precedent held in the HDFC Bank Ltd., the Tribunal held that no disallowance can be made under section 14A when there is no exempt income. Accordingly, the Tribunal deleted the entire disallowance of Rs. 43,23,20,191/- crore.
Editor’s Note:
The ruling strengthens the consistent judicial view that section 14A cannot be invoked where no exempt income is earned during the relevant assessment year. The decision also recognizes the right of the taxpayer to correct an erroneous claim made in the return during assessment proceedings, even without filing a revised return. The judgment cautions against the mechanical application of Rule 8D by the Assessing Officer when the basic condition of section 14A (existence of exempt income) is absent. Additionally, the taxpayers who have mistakenly made voluntary disallowances under section 14A may rely on this decision to seek withdrawal of such disallowances during assessment or appellate proceedings.
Citation: The Shri Hari Trust Vs Assistant Commissioner of Income-tax, Circle 21(3) { ITA No.7496/Mum/2025} of Hon’ble Mumbai Tribunal