ITAT Kolkata Clarifies Scope of Section 14A: Disallowance to Be Computed Only on Exempt-Income Yielding Investments

1. Background of the Dispute

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Suryamani Financing Company Ltd. Vs ITO (ITAT Kolkata) addressed a core controversy surrounding the application of Section 14A read with Rule 8D of the Income Tax Rules, 1962. The matter related to Assessment Year (AY) 2010-11, arising from disallowance of expenditure purportedly incurred in relation to exempt dividend income.

The appeal was directed against the order dated 11.12.2025 passed by the Addl/JCIT(A)-2, Coimbatore under Section 250 of the Income Tax Act 1961, whereby the appellate authority had confirmed the disallowance worked out under Section 14A and restricted to the total expenditure claimed by the assessee.

The central question before the Tribunal was:

Whether, for the purpose of disallowance under Section 14A read with Rule 8D(2)(iii), the entire investment portfolio should be considered, or only those specific investments which actually yielded exempt income during the relevant previous year.

2. Procedural History

2.1 Assessment Proceedings

• The assessee filed its return of income for AY 2010-11 on 21.09.2010.
• In the assessment framed under Section 143(3), the Assessing Officer (AO) observed that:
  • The assessee had earned exempt dividend income of ₹32,77,383.
  • At the same time, it had claimed expenditure of:
    • ₹2,25,400 towards employee payments, and
    • ₹1,39,895 under administrative expenses.
  • Trading activity in securities during FY 2009-10 was minimal.

Taking the view that a portion of this expenditure was relatable to earning exempt income, the AO invoked Section 14A read with Rule 8D.

• The AO computed a disallowance of ₹28,64,791 under Rule 8D.
• However, since the total expenditure as per the profit and loss account was only ₹5,75,293, the AO restricted the disallowance to this figure and assessed the total income at ₹5,99,440.

2.2 First Appellate Stage

The assessee challenged the assessment before the CIT(A)-3, Kolkata, whose ex parte order dated 05.09.2017 was subsequently set aside by the ITAT and the matter was remanded back vide order dated 22.06.2018.

On remand, the jurisdiction shifted and the Addl/JCIT(A)-2, Coimbatore heard the appeal. The appellate authority:

• Accepted the AO’s reasoning that managing a large investment portfolio inherently requires administrative and managerial resources.
• Held that the expenditure claimed was indeed linked to the earning of exempt dividend income.
• Confirmed the disallowance of ₹5,75,293 under Section 14A read with Rule 8D.

The assessee, still aggrieved, carried the matter in further appeal to the ITAT Kolkata.

3. Grounds Raised Before the Tribunal

The assessee’s primary grievance, encapsulated in Ground No. 1, was against the confirmation of disallowance of ₹5,75,293 under Section 14A. The other grounds were general and did not call for specific adjudication.

The core contention was that:

While computing disallowance under Rule 8D(2)(iii), only those investments which actually yielded exempt income during the year should be taken into account, and not the total investments appearing in the balance sheet.

4. Factual Matrix on Investments and Exempt Income

4.1 Dividend Income and Investment Details

During AY 2010-11, the assessee:

• Declared dividend income of ₹32,77,383 as exempt.
• Reflected investments in the balance sheet aggregating ₹57.30 Crore (elsewhere also stated in submissions as ₹80,29,41,833, being total investments).

However, the assessee pointed out that the exempt dividend income was received only from two specific scrips, as noted in the order of the Addl/JCIT(A):