1. Appeal against disallowance of expenditure under Section 14A for earning exempt dividend income by an NBFC. (Para 2 )
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2026 Supreme(Online)(ITAT) 30363
INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Vikas Awasthy, Judicial Member
Forerunner Capital Investments Limited – Appellant
Versus
Ward 9(1), Delhi – Respondent
ITA 4970/DEL/2026
Important Points
Disallowance under Section 14A of the Income Tax Act cannot exceed actual expenditure and should not include mandatory statutory compliance costs or depreciation, but rather be restricted to expenses actually aiding the earning of exempt income, such as rent.
Subject
Taxation - Direct Tax
Act Referred
Headnote
(A) Direct and Indirect Expenditure - Section 14A - Disallowance of expenditure incurred in earning exempt income - Statutory expenditures on compliances, depreciation, and audit fees cannot be disallowed as they are mandatory requirements and not directly related to the earning of exempt income. (Para 2, 4)
(B) Quantum of Disallowance - Limitation of disallowance - The disallowance under Section 14A of the Act cannot exceed the actual expenditure incurred; in the a case of an NBFC with minimal expenses, such disallowance should be restricted to eligible expenses like rent rather than total expenditure. (Para 4)
Issues: Whether the disallowance under Section 14A should be applied to the entire expenditure claimed by the assessee or restricted to specific expenses.
(B) Quantum of Disallowance - Limitation of disallowance - The disallowance under Section 14A of the Act cannot exceed the actual expenditure incurred; in the a case of an NBFC with minimal expenses, such disallowance should be restricted to eligible expenses like rent rather than total expenditure. (Para 4)
Issues: Whether the disallowance under Section 14A should be applied to the entire expenditure claimed by the assessee or restricted to specific expenses.
Legal Category Hierarchy
Advocates:
For the Appellants/Petitioners: Sangeeta Singh
For the Respondents: Nirmal Nangia
For the Appellants/Petitioners: Sangeeta Singh
For the Respondents: Nirmal Nangia
Table of Contents
2. Assessee argued no direct expenditure incurred for exempt income; department supported the disallowance order. (Para 2 , 3 )
3. No material showed direct expenditure for exempt income; disallowance under Section 14A cannot exceed actual expenditure. (Para 4 )
4. Disallowance under Section 14A is restricted to actual direct expenditure incurred for earning exempt income. (Para 4 )
5. Appeal partly allowed; disallowance under Section 14A restricted to rent expenditure only. (Para 5 )
6. Can disallowance under Section 14A exceed the actual expenditure incurred for earning exempt income?
No, the disallowance under Section 14A of the Act cannot be more than the actual expenditure incurred. (Para 4 )
7. What is the scope of Rule 8D(ii) for computing disallowance?
Rule 8D(ii) provides for a disallowance equal to 1% of the annual average value of investments yielding exempt income. (Para 4 )
8. Is depreciation under Section 32 considered direct expenditure for earning exempt income?
No, depreciation is a statutory allowance and not considered direct expenditure for earning exempt income under Section 14A. (Para 2 , 4 )
आदेश / ORDER
PER VIKAS AWASTHY, JUDICIAL MEMBER:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), Delhi-3 [in short ‘the CIT(A)’] dated 08.09.2020, for Assessment Year 2017-18.
2. Ms. Sangeeta Singh, appearing on behalf of the assessee submits that the assessee is a Non-Banking Finance Company (NBFC) engaged in activities of financing and investments. Admittedly, the assessee received dividend income of Rs.42,73,338/- during the period relevant to assessment year under appeal. No interest expenses were claimed for making investments on which dividend was received. During the year, the total expenditure claimed was:
| Depreciation (u/s.32 of the Act) | Rs.7,65,917/- |
| Audit Fee | Rs.25,000/- |
| Provision for expenses (MCA Challan filing fee) | Rs.1,842/- |
| Rates and Taxes (includes services tax on audit fee Rs.4,500/- and ROC fees Rs.3,075/-) | Rs.7,575/- |
| Rent | Rs.30,000/- |
| Total | Rs.8,30,334/- |
The ld. AR contended that depreciation is statutory allowance u/s.32 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and audit fees represent mandatory statutory compliance expenditure incurred for audit of books of account under the Companies Act, 2013 and Income Tax Act. Provision for expenses represent MCA challan fees incurred for statutory corporate filing and compliance requirement under the Companies Act. The rent is paid for maintaining office premises and business establishment of the company for carrying out its regular administrative and corporate functions. The Assessing Officer (AO) has made disallowance of expenditure u/s.14A r.w.r 8 D of the Act on the entire expenditure claimed by the assessee i.e. Rs.8,30,334/-. The disallowance, if, any u/s.14A of the Act can be made in respect of direct expenditure i.e. rental income.
3. Per contra, Shri Nirmal Nangia, representing the department vehemently relying on findings of the CIT(A) and prayed for dismissing appeal of the assessee.
4. Both sides heard, orders of the lower authorities examined. It is an undisputed fact that the assessee is a registered NBFC and has earned dividend income of Rs.42,73,338/-. No suo-motto disallowance was made by the assessee for earning exempt income. No material is brought on record to show that any direct expenditure is incurred by the assessee for earning exempt income. Rule 8D (ii) provides that an amount equal to 1% of annual average of monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. The disallowance u/s.14A of the Act cannot be more than the actual expenditure. From perusal of the documents placed on record, I find that apart from statutory expenditure on compliances and depreciation, the only expenditure claimed by the assessee is rent Rs.30,000/-. I am of considered view, that disallowance u/s.14A of the Act is to be restricted to rent expenditure only.
5. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on Monday the 06th day of July, 2026.
