IN THE INCOME TAX APPELLATE TRIBUNAL “J(SMC)” BENCH MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER &

SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No. 8360/Mum/2025 (Assessment Year: 2017-18)

(Assessment Year: 2017-18)

(Assessment Year: 2017-18)

(Assessment Year: 2017-18)

(Assessment Year: 2017-18)

(Assessment Year: 2017-18)

(Assessment Year: 2017-18)

(Assessment Year: 2017-18)

(Assessment Year: 2017-18)

Assessee by Shri Ashok Shah, Ld. AR Revenue by Shri Aditya Rai, Ld. DR Date of Hearing 08.01.2026 Date of Pronouncement 12.01.2026 आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM:

This appeal by the assessee is directed against the order passed by the learned Addl./JCIT (A)-2 from the office of Commissioner of Income Tax (Appeals), Lucknow [hereinafter referred to as “CIT(A)”], dated 09.10.2025, passed under section 250 of the Income-tax Act, 1961[hereinafter referred to as “the Act”], for Assessment Year 2017–18, arising out of the assessment order dated 14.12.2019 passed by the Assessing Officer under section 143(3) of the Act.

2. The brief facts of the case are that the assessee, an individual, for the assessment year under consideration filed his return of income electronically on 29.07.2017, declaring a total income of Rs. 21,70,080/-. The return was processed under section 143(1) of the Act. Subsequently, the case was selected for limited scrutiny under CASS, with the specific reason to examine the allowability of expenses incurred in relation to earning of exempt income. Statutory notice under section 143(2) dated 09.08.2018 was issued and duly served upon the assessee. Further notice under section 142(1) dated 13.08.2019 was also issued. During the year under consideration, the assessee earned exempt income comprising dividend income of Rs. 11,60,930/-, and long-term capital gains (STT paid) of Rs. 2,49,99,481/-, exempt under section 10(38) of the Act. No disallowance under section 14A was made by the assessee in the return of income.

3. During the course of assessment proceedings, the Assessing Officer observed that the assessee had earned substantial exempt income but had not made any disallowance under section 14A of the Act. The assessee was accordingly called upon to explain as to why disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962 should not be made. In response, the assessee submitted that the expenses relating to earning of exempt income were not debited to the Profit and Loss Account, but were directly debited to the capital account, and therefore were not claimed as deduction in the computation of income. Since no expenditure was claimed in relation to exempt income, the provisions of section 14A were not applicable.

4. The Assessing Officer did not accept the explanation of the assessee. He held that the provisions of section 14A were applicable and, being dissatisfied with the correctness of the assessee’s claim, proceeded to compute disallowance in accordance with Rule 8D, as amended with effect from 02.06.2016.Applying Rule 8D(2), the Assessing Officer computed the disallowance at Rs. 81,59,223/-, being 1 percent of the annual average of the monthly averages of the value of investments yielding exempt income. However, in view of the proviso to Rule 8D, which restricts the disallowance to the total expenditure claimed by the assessee, the Assessing Officer restricted the disallowance to Rs. 13,76,621/-, being the total expenses debited by the assessee during the year. The said amount of Rs. 13,76,621/- was added to the total income of the assessee, and the assessment was completed under section 143(3) of the Act at a total income of Rs. 35,46,700/-, after allowing deduction under Chapter VIA. Interest under sections

234A, 234B, 234C and 234D was also charged accordingly.

5. Aggrieved by the assessment order, the assessee carried the matter in appeal before the learned CIT(A). During the appellate proceedings, the assessee reiterated that:

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No expenditure relating to exempt income