Section 14A of the Income Tax Act, 1961, cannot be invoked to disallow expenditure if the potential income, such as dividends, is taxable rather than exempt, as the essential condition for the section is the existence of income that does not form part of the total income.

ORDER

PER BRAJESH KUMAR SINGH, AM,

This appeal by the Revenue is directed against the order dated 29.09.2025 of the Ld. Commissioner of Income Tax (Appeals)-30, New Delhi-110055 [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the Assessment Order dated 04.03.2025 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) by the Assessing Officer, ACIT, Central Circle-31, New Delhi, (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2023-24.

2. The assessee has raised the following grounds of appeal:

“ 1. On the facts and in the circumstances of the case and in law the Ld. NFAC/CIT(A) erred in -

a. determining taxable income at Rs.6,28,000/- against returned income in a sum of Rs.2,68,28,06,420/-;

b. Rs.6,28,000/- being the amount of disallowance made u/s 14A r.w.s. Rule 8D of the I.T. Rules, 1962;

The above actions being arbitrary, fallacious, unwarranted and opposed to principles of natural justice must be quashed with directions for appropriate relief.

2.1 The AO noted that the assessee had non-current investment of Rs. 628 lacs as on 31.03.2021 but no disallowance u/s 14A of the Act was made by the assessee. The AO issued a show-cause notice to the assessee asking it to explain as to why disallowance u/s 14A of the Act r.w Rule 8D of the IT Rules, 1962 should not be made. After considering the reply of the assessee, the AO made a disallowance of Rs. 6,28,000/- u/s 14A of the Act.

3. In the appeal filed by the assessee, the Ld. CIT(A)-30, Delhi confirmed the order of the AO making an addition of Rs. 6,28,000/- u/s 14A of the Act r/w Rule 8D of the IT Rules, 1962 has been confirmed.

3.1 The facts of the case, the reason for the disallowance and the confirmation by the Ld. CIT(A) alongwith the submission of the assessee is stated in the written submission of the assessee, which is reproduced as under:

2.1 The brief facts of the case are that the Appellant herein, a Private Limited Company, is a building contractor of international repute. It submitted a return of income u/s. 139[1] of the Act declaring an income of Rs 268.28 Crores+. The assessment was completed u/s. 143(3) of the Act on 04.03.2025 after making an addition of Rs. 6.28.000/- u/s 14A of the Act read with Rule 8D of the Rules. The calculation with regard to the addition is to be found on pages 3 and 4 of the assessment order.

2.2 The Appellant had filed First Appeal against that addition made by the Assessing Officer in assessment. The Ld. CIT(A)-30, for reasons stated in para 8 on pages 15 and 16 of the impugned order, has confirmed the addition. It is in this background that the following Grounds of Appeal have been taken in this appeal:-

GROUNDS:

3. The Grounds of Appeal are as under:-

On the facts and in the circumstances of the case and in law the Ld. NFAC/CIT(A) erred in-

a determining taxable income at Rs. 6.28,000/- against returned income in a sum of Rs. 2.68.28.06. 420/-

b. Rs.6.28.000/- being the amount of disallowance made u/s 14A r.w.s. Rule BD of the I.T. Rules, 1962

The above actions being arbitrary, fallacious, unwarranted and opposed to principles of natural justice must be quashed with directions for appropriate relief.

SUBMISSIONS:

4.1 The Assessee was put to question by the AO during the course of the assessment proceedings as to why an addition u/s. 14A of the Act ought not to be made. The reply given by the Assess