Facts of the Case

As noted from the judgment (Page 2) :

  • The assessee, M/s ACB India Ltd., earned exempt dividend income of ₹47,950 during AY 2011-12.
  • The Assessing Officer applied Rule 8D(2)(ii) and computed disallowance of ₹39,05,855 under Section 14A.
  • The disallowance was calculated as 0.5% of average investments, amounting to a figure disproportionately higher than the exempt income.
  • The CIT(A) restricted the disallowance to ₹1,644 based on dividend-yielding investments.
  • The ITAT upheld the CIT(A)’s order relying on earlier Delhi High Court ruling in assessee’s own case (AY 2008-09).

Issues Involved

  1. Whether disallowance under Section 14A read with Rule 8D can exceed the exempt income earned by the assessee.
  2. Whether the method adopted by the Assessing Officer under Rule 8D was justified in the given facts.
  3. Applicability of earlier precedents and principles governing reasonable disallowance.

Petitioner’s Arguments (Revenue)

  • The Assessing Officer correctly invoked Rule 8D for computing disallowance.
  • The statutory formula under Rule 8D mandates disallowance based on average investments irrespective of actual exempt income.
  • The CIT(A) and ITAT erred in restricting the disallowance substantially.

Respondent’s Arguments (Assessee)

  • The disallowance computed by the Assessing Officer was excessive and disproportionate, being more than 8000% of the exempt income .
  • Only investments yielding exempt income should be considered.
  • Reliance placed on earlier Delhi High Court judgment in assessee’s own case.

Court’s Findings / Order

For AY 2011-12 (ITA 1255/2018 & 1257/2018):

  • The Court refused to entertain the appeals and dismissed them.
  • It upheld the ITAT’s decision restricting disallowance.
  • No substantial question of law arose.

For AY 2012-13 & 2013-14 (Other ITAs):

  • The Court issued notice considering the impact of the Supreme Court ruling in Maxopp Investment Ltd. vs CIT (2018) 402 ITR 640 (SC).
  • Matter required further examination in light of evolving jurisprudence 

Important Clarification

  • Disallowance under Section 14A cannot be absurd or disproportionate to the exempt income earned.
  • Courts have consistently leaned towards reasonable correlation between exempt income and disallowance.
  • The judgment reinforces judicial restraint where mechanical application of Rule 8D leads to excessive disallowance. 

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:8342-DB/SKN27112018ITA12552018_114115.pdf

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