ITAT Mumbai Deletes Section 14A Disallowance and Section 115JB Book Profit Addition in Absence of Exempt Income: DCIT vs SP Port Maintenance Private Limited

Case Overview

The Income Tax Appellate Tribunal, Mumbai Bench, pronounced a significant ruling in DCIT Vs SP Port Maintenance Private Limited, dismissing two departmental appeals pertaining to Assessment Years 2017-18 and 2018-19. Both appeals were directed against a common order dated 27.09.2023 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, rendered under Section 250 of the Income Tax Act, 1961.

Given that both appeals involved the same assessee, arose from identical factual matrices, and raised common legal grounds, the Tribunal consolidated them and treated AY 2017-18 as the lead year for adjudication purposes. The ruling addressed two fundamental questions — the applicability of Section 14A read with Rule 8D when no exempt income is actually earned, and whether such disallowance can be added back while computing book profit under Section 115JB.

Background and Factual Matrix

Nature of the Assessee's Business and Return Filing

SP Port Maintenance Private Limited is a private limited company engaged in port-related activities and management consultancy services. For AY 2017-18, the assessee filed its return of income electronically on 31.10.2018, declaring a loss of Rs. 1,27,79,381/- under the normal provisions of the Income Tax Act, 1961, and a book loss of Rs. 82,98,088/- under Section 115JB. For AY 2018-19, the assessee similarly declared a loss of Rs. 3,02,33,301/-.

Investment Portfolio of the Assessee

As on 31.03.2017, the assessee's balance sheet reflected the following investment positions:

  • Non-Current Investments in unquoted equity shares of subsidiary: Rs. 65,00,01,000/-
  • Current Investments in mutual funds: Rs. 5,46,91,52,000/-
  • Total Investments: Rs. 6,11,91,53,000/-

Since AY 2017-18 was the first year of operations, only closing balances appeared in the books — there were no opening balances to compare. The return was taken up for limited scrutiny, and notices under Section 143(2) and Section 142(1) were duly issued.

The Assessee's Position Before the AO

The assessee, responding to the Assessing Officer's query regarding potential disallowance under Section 14A read with Rule 8D, submitted the following:

  • No dividend income or long-term capital gains had been earned on the unquoted equity shares or growth mutual funds during the relevant year
  • All investments were financed exclusively through the assessee's own funds, raised by issuance of Optional Convertible Debentures (treated as entirely equity in nature) subscribed by its holding company
  • Short-term capital gains earned on redemption of mutual funds were duly disclosed and offered to tax
  • No interest expenditure or similar expenses were claimed or debited in connection with any investment activity

The Assessing Officer's Action

Notwithstanding the assessee's submissions, the Assessing Officer proceeded to make a disallowance of Rs. 2,77,00,000/- under Section 14A read with Rule 8D. The AO's reasoning rested on two pillars:

  1. CBDT Circular No. 5/2014 dated 11.02.2014, which, in the AO's reading, mandated that disallowance under Section 14A read with Rule 8D is triggered even when exempt income has not actually been earned during the financial year, provided the investments carry the potential to generate such income.

  2. M/s. Maxopp Investment Ltd., 91 Taxman 154 (Supreme Court of India), which held that expenditure incurred in relation to dividend income — whether from strategic investments or stock-in-trade — must be disallowed under Section 14A.