ROHIT REAL ESTATES (P) LTD. vs ASSISTANT COMMISSIONER OF INCOME TAX

Introduction

The Income Tax Appellate Tribunal (ITAT), Lucknow Bench, in the case of Rohit Real Estates Pvt Ltd v. Asstt. Commissioner of Income Tax (ITA No. 177/LKW/2022, Assessment Year 2017-18), delivered a significant ruling on the interplay between Section 14A of the Income Tax Act, 1961, and Rule 8D of the Income Tax Rules, 1962. The core issue revolved around the disallowance of expenditure claimed to have been incurred in relation to earning exempt income, specifically dividend income. The Tribunal, while upholding the Assessing Officer’s (AO) satisfaction to invoke Section 14A, provided a crucial clarification on the quantum of disallowance, holding that it cannot exceed the exempt income earned. This commentary delves into the facts, legal reasoning, and implications of this order, which was pronounced on 06 May 2026.

Facts of the Case

The assessee, Rohit Real Estates Pvt Ltd, a company incorporated under the Companies Act, filed its return of income for Assessment Year 2017-18 on 29 October 2017, declaring a total income of Rs. 8,22,96,116/-. The case was selected for limited scrutiny through the Computer Assisted Scrutiny System (CASS) to examine expenses incurred for earning exempt income. During assessment proceedings, the AO issued a notice under Section 143(2) of the Act, specifically querying the expenditure related to earning exempt income in the form of dividend amounting to Rs. 31,070/-.

The assessee contended that no expenditure was incurred for earning the exempt income. However, the AO found this explanation unsatisfactory and invoked Section 14A(2) read with Rule 8D(2)(ii) of the Rules. Consequently, the AO computed a disallowance of Rs. 2,54,373/- and assessed the total income at Rs. 8,25,50,493/-. Aggrieved, the assessee appealed to the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, who sustained the addition and dismissed the appeal. The assessee then approached the ITAT.

Reasoning and Legal Analysis

The ITAT’s reasoning is structured around two primary contentions raised by the assessee: (a) the AO’s failure to record proper satisfaction before invoking Section 14A, and (b) the impermissibility of disallowance exceeding the exempt income.

1. Satisfaction Under Section 14A:
The assessee argued that the AO did not record the requisite satisfaction as mandated by law before applying Section 14A read with Rule 8D. The Tribunal, after perusing the assessment order, rejected this contention. It observed that the AO had indeed recorded satisfaction, noting that the administrative expenses disallowed by the assessee suo-moto were not commensurate with the volume of investments. The Tribunal held that the AO’s satisfaction was justified, as the suo-moto disallowance of Rs. 3,085/- was inadequate given the investment volume. Thus, the procedural requirement of recording satisfaction was met.

2. Quantum of Disallowance:
The pivotal issue was whether the disallowance under Rule 8D(2)(ii) could exceed the exempt income earned. The assessee earned dividend income of Rs. 31,070/- and made a suo-moto disallowance of Rs. 3,085/-. However, the AO computed the disallowance at Rs. 2,57,458/-. The assessee contended that this was impermissible, relying on several judicial precedents, including:
– PCIT vs. JSW Energy Ltd. (2023) 153 taxmann.com 208 (Bom)
– PCIT vs. Tata Capital Ltd. (2024) 161 taxmann.com 557 (Bom)
– PCIT vs. Keti Construction Ltd. (2024) 162 taxmann.com 278
– PCIT vs. Avantha Realty Ltd. (2024) 164 taxmann.com 376 (Cal)
– Unilever Industries (P.) Ltd. vs. DCIT (2024) 158 taxmann.com 599 (Mum-Trib)
– M/s. Nirved Traders (P.) Ltd. vs. Dy. CIT (IT Appeal No. 149 of 2017, dated 23.04.2019)

The Departmental Representative (DR) conceded that judicial pronouncements on this issue were against the Revenue. The Tribunal, following the Co-ordinate Bench decision in Unilever Industries Pvt. Ltd. vs. DCIT (2024) 158 taxmann.com 599 (Mum-Trib), which relied on the Karnataka High Court’s judgment in Pragathi Krishna Gramin Bank vs. Jt. CIT (2018) 95 taxmann.com 41, held that the disallowance computed under Rule 8D(2)(ii) should not exceed the exempt income earned. The Tribunal also cited M/s. Nirved Traders (P.) Ltd. vs. Dy. CIT, which explicitly held that disallowance under Rule 8D(2)(ii) cannot exceed the exempt income.

3. Application of the Explanation to Section 14A:
The assessee also challenged the application of the Explanation below Section 14A, inserted by the Finance Act, 2022, arguing it had no retrospective effect. However, the Tribunal did not delve into this issue, as the primary relief was granted on the quantum point. The Tribunal’s decision implicitly suggests that even if the Explanation were considered, the binding precedents on the quantum limitation would prevail.

Conclusion

The ITAT partly allowed the appeal, directing the AO to restrict the disallowance under Section 14A read with Rule 8D to the extent of the exempt income earned, i.e., Rs. 31,070/-. The Tribunal upheld the AO’s satisfaction to invoke Section 14A but provided relief on the quantum, aligning with the settled legal position that disallowance cannot exceed the exempt income. This ruling reinforces the principle that while the Revenue can scrutinize expenditure related to exempt income, the disallowance must be proportionate and cannot be arbitrary. The order was pronounced in open court on 06 May 2026.

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