No Presumptive Disallowance u/s 14A: ITAT Deletes ₹118.68 Cr Addition Against Great Eastern Spinning [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) ruled that disallowance under Section 14A of the Income Tax Act, 1961 cannot be based upon presumptions and that the Assessing Officer (AO) must record a clear and reasoned satisfaction for invoking Rule 8D.

The appellant, The New Great Eastern Spinning and Weaving Company Limited, is engaged in the business of yarn manufacturing and trading of cloth and home décor items. The assessment for the Assessment Year 2018-19 was completed under Section 143(3) of the Income Tax Act, 1961.

The case arose when the AO made a disallowance of expenditure under Section 14A read with Rule 8D amounting to ₹1,36,48,000, after rejecting the assessee’s suo motu disallowance of ₹17,79,133. After giving credit for the voluntary disallowance, a net addition of ₹1,18,68,867 was made.

The disallowance was triggered on the ground that the assessee had made substantial investments in shares and mutual funds, largely out of surplus funds generated from the sale of factory land in earlier years, and had earned exempt income. The National Faceless Appeal Centre upheld the action of the AO, leading to the appeal before the Tribunal.

The appellant contended that it had made a bona fide and reasoned disallowance by identifying direct and proximate expenses attributable to earning exempt income, calculating demat charges, portfolio management service fees, depository participant charges, and bank charges, all of which were voluntarily disallowed.

Further, argued that only a limited proportion of employee salary and advisory costs could be attributed to investment activity, as the investments were largely in debt mutual funds and managed through portfolio management services, requiring minimal internal involvement. Therefore, the AO failed to point out any specific expenditure from the profit and loss account having a direct nexus with exempt income.

The Revenue revealed that the assessee had a sizable investment portfolio which necessarily required managerial oversight and periodic review with statistical decision-making. Subsequently, neither the assessee’s estimation of expenses is evidenced nor the absence of a separate bank account for investments made it difficult to ascertain the true expenditure attributable to exempt income.

The Bench of Amit Shukla, Judicial Member and Girish Agrawal, Accountant Member allowed the appeal and deleted the addition of ₹1,18,68,867. The Tribunal reasoned that Section 14A is founded on the principle of proximate cause and does not permit disallowance on conjectures or presumptions. As Rule 8D can be invoked only after the Assessing Officer records a clear dissatisfaction with the correctness of the assessee’s claim, having regard to the accounts.

The Bench noted that the assessee had already disallowed all identifiable direct expenses relating to investment activity and had provided a reasoned estimate of limited administrative involvement. In contrast, the AO failed to identify any specific expenditure from the accounts that had a live nexus with earning exempt income.

Rejecting the approach of the appellate authority, the Tribunal ruled that a general assumption that a large investment portfolio must involve substantial administrative effort is insufficient to sustain a disallowance under Section 14A. The mechanical application of Rule 8D, without a legally sustainable satisfaction, was found to be contrary to the statutory scheme.

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