Cera Sanitaryware wins on Section 14A issue; improper invocation of Rule 8D leads to deletion of Rs.4.70 lakh disallowance [Read Order]

The Income Tax Appellate Tribunal (ITAT) Ahmedabad Bench has ruled in favor of Cera Sanitaryware Limited, deleting a disallowance of Rs.4,70,331 made under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The tribunal held that the Assessing Officer (AO) improperly invoked Rule 8D without recording valid dissatisfaction with the assessee’s suo moto disallowance of expenses related to exempt income.

Cera Sanitaryware had earned exempt income of Rs.22,44,171 during the assessment year 2020-21 and voluntarily disallowed Rs.3,69,059 as expenses attributable to such income. The AO, however, rejected this computation and applied Rule 8D, calculating a higher disallowance of Rs.8,39,390. After adjusting for the assessee’s suo moto disallowance, an additional Rs.4,70,331 was added to taxable income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, prompting the company to appeal before the ITAT.

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ITAT Bench, comprising Annapurna Gupta (Accountant Member) and T.R. Senthil Kumar (Judicial Member) observed that the AO failed to provide cogent reasons for rejecting Cera Sanitaryware’s explanation. The assessee had justified its disallowance by detailing employee costs, depreciation, and overheads linked to exempt income, supported by a breakdown of time spent by specific employees on investment activities. The ITAT noted that the AO’s dissatisfaction was cursory and lacked objective analysis, particularly since the company had sufficient interest-free funds (Rs.77,289.15 lakhs) to cover its investments (Rs.26,243.17 lakhs).

The tribunal referenced the Supreme Court’s ruling in South India Bank Ltd. vs CIT (2021), which held that no disallowance under Section 14A is warranted if investments are made from own funds. It emphasized that the AO’s invocation of Rule 8D was unjustified, as the assessee had demonstrated a reasonable basis for its disallowance, and the revenue failed to disprove this with evidence from the books of accounts.

Additionally, the ITAT allowed another ground raised by Cera Sanitaryware, deleting a Rs.45,97,690 addition under Section 41(1) of the Act. The tribunal found that the income assessed under Section 143(1) was incorrectly taken as the starting point for scrutiny assessment, as no intimation under this provision was ever issued to the assessee. It also noted that the disputed amount was already included in the company’s taxable income, making the addition a case of double taxation.

In its final order, the ITAT directed the deletion of both disallowances, allowing Cera Sanitaryware’s appeal in full.

To Read the full text of the Order CLICK HERE

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