Disallowance under S.14A cannot be made where the assessee has not claimed any expenditure against taxable income; the provision requires the existence of a claimed expenditure relatable to exempt income as a condition precedent.

आदेश / O R D E R

PER AMIT SHUKLA (J.M):

The aforesaid appeal has been filed by the assessee against the impugned order dated 04.12.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2014-15.

The sole grievance raised by the assessee in the present appeal relates to the disallowance of ₹6,23,736 made under section 14A read with Rule 8D of the Income Tax Rules, 1962 and sustained by the learned CIT(A).

Briefly stated, the facts borne out from the assessment records are that the assessee is an individual engaged in business activities through two proprietary concerns, namely M/s. Chic Baby and M/s. Duru Realty. The return of income was originally filed on 29.07.2014 declaring total income of ₹4,90,000. Subsequently, a revised return was filed declaring income of ₹54,55,448. During the course of scrutiny assessment proceedings, the Assessing Officer observed that the assessee had earned exempt income comprising dividend income of ₹1,85,455 and long-term capital gains amounting to ₹6,86,351. The Assessing Officer further noted that the assessee was holding substantial investments and was availing certain financial and administrative infrastructure. According to him, expenditure attributable to earning exempt income was liable to be disallowed under section 14A. Accordingly, invoking the provisions of section 14A read with Rule 8D , he computed and disallowed a sum of ₹6,23,736.

Before the learned CIT(A), the assessee specifically contended that no expenditure whatsoever had been claimed in relation to earning of exempt income. It was submitted that one of the proprietary concerns, namely M/s. Chic Baby, was being assessed under the presumptive provisions of section 44AD wherein income had been offered at the prescribed percentage of turnover and no specific expenditure had been claimed as a deduction. It was further submitted that in respect of M/s. Duru Realty, the assessee had not claimed any revenue expenditure in the profit and loss account. Rather, the entire expenditure incurred in the real estate business had been capitalized to work-in-progress. It was pointed out that even interest expenditure incurred during the year had either been directly reduced from the capital account or capitalized to work-in-progress and no deduction thereof had been claimed while computing taxable income. It was thus argued that in absence of any claim of expenditure, the very foundation for invoking section 14A was absent.

The assessee had further submitted that the investments generating exempt income were old investments carried forward from earlier years and no fresh investment activity involving deployment of borrowed funds had been undertaken during the relevant previous year. It was also contended that the Assessing Officer had mechanically invoked Rule 8D without recording the mandatory satisfaction contemplated under section 14A(2) and without demonstrating any nexus between the alleged expenditure and the exempt income earned by the assessee. However, the learned CIT(A) was not convinced with the submissions advanced on behalf of the assessee and confirmed the disallowance made by the Assessing Officer.

Before us, the learned counsel reiterated the submissions advanced before the lower authorities and drew our attention to the statement of accounts and the written submissions placed in the paper book. He submitted that the assessee had not claimed any expenditure which could remotely be said to be incurred for earning dividend income or long-term capital gains. Insofar as M/s. Chic Baby is concerned, income had been declared under section 44AD and therefore no deduction of any expenditure had been claimed separately. Insofar as M/s. Duru Realty is concerned, all expenditures including interest expenditure and administrative expenses stood capitalized to work-in-pro