J V HOLDINGS PRIVATE LIMITED,BANGALORE V. DCIT, CENTRAL CIRCLE-1(3), BANGALORE

ITA 282/BANG/2025

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The case involves M/s JV Holdings Pvt. Ltd., a private limited company engaged in real estate development, which appealed against the order of the CIT(A) confirming a disallowance made by the Assessing Officer under section 14A read with Rule 8D of the Income Tax Rules. The disallowance pertained to expenses related to earning exempt income, specifically a substantial dividend income received from a long-term investment. The Tribunal examined whether the disallowance was correctly computed by considering only those investments that actually yielded exempt income. The Tribunal concluded that the disallowance should be restricted to the amount already disallowed by the assessee, as it was found that only the investments yielding exempt income should be considered for such disallowances.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 652909 (ITAT-BANGALORE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2018-2019
• Laws Referred To: Income Tax Act, Income Tax Rules
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEHA SAHAY
• Assessee Lawyers: SANDEEP C
• Keywords: Set aside; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No. 282/Bang/2025 Assessment Year: 2018-19 M/s JV Holdings Pvt. Ltd., No.15, 1st Floor, Embassy Point, Infantry Road, Bengaluru – 560 001. PAN – AABCJ 9763 F Vs. The Dy. Commissioner of Income Tax, Central Circle – 1(3), Bengaluru. . APPELLANT RESPONDENT Assessee by : Shri Sandeep C, CA Revenue by : Smt. Neha Sahay, JCIT (DR) Date of hearing : 17.04.2025 Date of Pronouncement : 19.06.2025 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the ld. CIT(A) - 11, Bengaluru dated 26/12/2024 in DIN No. ITBA/ APL/M/250/2024-25/1071587724(1) for the assessment year 2018-19. 2. The only issue raised by the assessee against the order passed by the learned CIT(A) confirming the disallowance made by the Assessing Officer (AO) under section 14A read with Rule 8D of the Income Tax Rules, amounting to ₹ 2,37,88,930.00 only. ITA No.282/Bang/2025 Page 2 of 5 . 3. Briefly stated facts are that, the assessee is a private limited company and engaged in the business of real estate development and related investments. The assessee had made an investment of ₹ 50,000 in the shares of Golflink Embassy Business Park Management Services Private Limited during the financial year 2008-09. Against this investment, the assessee earned dividend income of ₹ 2.50 crores in the year under consideration which is more than 500 times of the actual investment. The assessee had suo motu disallowed ₹ 125,000 against this exempt income, contending that the dividend was received as a single receipt through the banking channel and without human intervention. Thus, the disallowance made under section 14A of the Act was reasonable. However, during the assessment proceedings, the AO observed: i. The dividend income of ₹ 2.50 crores constituted 40.22% of the assessee’s total income. ii. There was a substantial increase in investments, more than 20.87% compared to the preceding year. iii. There was an increase in non-current liabilities by 17.80% and an increase in interest expenses by 79.15% over the previous year. 4. Based on these observations, the AO concluded that a disallowance under section 14A read with Rule 8D was warranted. Accordingly, the disallowance computed by the AO under Rule 8D amounted to ₹ 2,39,13,930.00 from which the suo motu disallowed amount of ₹ 125,000 was reduced, resulting in an effective disallowance ITA No.282/Bang/2025 Page 3 of 5 . of ₹ 2,37,88,930.00 which was added to the total income of the assessee. 5. Aggrieved, the assessee preferred an appeal before the learned CIT(A), who confirmed the AO’s order. Being aggrieved by the order of Ld. CIT-A, the assessee is in appeal before us. 6. The learned Authorized Representative (AR) before us filed written submissions and raised various contentions, including that the assessee had already made a suo motu disallowance of ₹ 125,000, against which no specific infirmity was pointed out by the AO. Further, the ld. AR contended that no satisfaction had been recorded under section 14A read with Rule 8D for rejecting the assessee’s computation. 7. Alternatively, the learned AR submitted that the disallowance should be restricted only to the investment that actually yielded dividend income. As per the AR, the dividend income of ₹ 2.50 crores was earned from the investment of ₹ 50,000 made in 2008-09, and thus only this investment should be considered for the purpose of disallowance. 8. On the other hand, the learned Departmental Representative (DR) vehemently argued that there was a substantial increase in investments as well as interest-bearing loans, leading to higher interest expenses. Therefore, it was beyond reasonable doubt that the borrowed funds were utilized for investments that either yielded exempt income or were capable of yielding exempt income. Hence, the interest expenses could not be allowed against the taxable income. The ld. DR vehemently supported the order of the authorities below. ITA No.282/Bang/2025 Page 4 of 5 . 9. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly and apparently, it appears to us that there is made investment, capable of generating exempt income, out of interest-bearing borrowed funds. Thus, such interest should be considered for the purpose of disallowance. However, the question arises whether such interest can be disallowed under section 14A read with Rule 8D of the Income Tax Rules. As far as the provisions of Rule 8D are concerned, it is the settled position that the amount of disallowance must be calculated in the manner prescribed therein. In other words, while making disallowance under the provisions of section 14A read with Rule 8D, only the investments that have actually yielded dividend income should be considered. Undeniably, in that situation, the disallowance computed is much lower than the suo motu disallowance made by the assessee. 10. Without prejudice to the above, we clarify that the amount of interest on borrowed funds can be allowed as a deduction under sections 36(1)(iii) of the Act, provided it has been incurred for the purpose of business. However, the authorities below have not invoked the provisions of sections 36(1)(iii) of the Act. Therefore, we are not inclined to look into the disallowance of interest expenses under this section, as the issue at hand strictly relates to section 14A read with Rule 8D of Income Tax Rules. In view of the above, we are of the considered opinion that the disallowance under section 14A read with Rule 8D must be calculated strictly in the manner prescribed, i.e., by considering only the investments that have actually yielded exempt income. In such scenario, such a disallowance is going to be lower than the suo motu ITA No.282/Bang/2025 Page 5 of 5 . disallowance made by the assessee. Accordingly, we set aside the findings of the learned CIT(A) and direct the AO to restrict the disallowance to the amount suo motu disallowed by the assessee, i.e., ₹ 125,000.00 only. Hence, the ground of appeal raised by the assessee is hereby allowed. 11. In the result, the appeal filed by the assessee is allowed. Order pronounced in court on 19th day of June, 2025 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 19th June, 2025 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "