ITAT Mumbai Upholds Section 14A Disallowance; Confirms AO’s Recorded Dissatisfaction

The “B” Bench of the Income Tax Appellate Tribunal, Mumbai, dismissed the appeals of Nuvama Wealth Management Ltd. for AYs 2014–15 and 2015–16, upholding the invocation of Section 14A read with Rule 8D.

AY 2014–15: Disallowance Restricted to Exempt Income

For AY 2014–15, the assessee had earned exempt dividend income of ₹7,46,429 and made a suo motu disallowance of ₹65,793 under Section 14A. The Assessing Officer rejected the working as inadequate and computed disallowance under Rule 8D at ₹99.23 lakh, resulting in a net addition of ₹98.57 lakh. On appeal, the CIT(A) restricted the disallowance to the extent of exempt income, relying on settled jurisprudence that Section 14A disallowance cannot exceed the exempt income earned during the year. Before the Tribunal, the assessee contended that no proper dissatisfaction had been recorded before invoking Rule 8D. The ITAT rejected this contention, holding that the Assessing Officer had expressly recorded dissatisfaction with the assessee’s working. The Tribunal noted that even implied dissatisfaction is sufficient for invoking Rule 8D, as recognized by judicial precedents. Accordingly, the ground challenging invocation of Rule 8D was dismissed.

AY 2015–16: Rule 8D Computation Sustained

For AY 2015–16, the assessee earned exempt income of approximately ₹19.16 crore and made a suo motu disallowance of ₹13.18 lakh. The Assessing Officer computed disallowance under Rule 8D at ₹1.27 crore. The CIT(A) applied the principle that disallowance cannot exceed exempt income. Since the Rule 8D computation was lower than the exempt income earned, the disallowance was sustained. The ITAT affirmed this approach. It further observed that the Assessing Officer had validly recorded dissatisfaction with the correctness of the assessee’s claim, particularly noting the scale of investments and involvement of senior management resources in managing such investments.

Accordingly, both appeals were dismissed.