Section 14A Disallowance Must Be Capped at Actual Exempt Income — ITAT Mumbai in Godrej Properties Ltd. Case
Background and Context
A significant question arose before the Income Tax Appellate Tribunal, Mumbai, in the case of Godrej Properties Ltd. Vs Assessing Officer NFAC concerning Assessment Year 2018-19: can an assessee be permanently bound by an inflated Section 14A disallowance that it had itself reported in its original return of income, even when the actual exempt income earned during the year is far lower than the amount disallowed?
The facts of this case present a somewhat unusual scenario. Unlike the typical Section 14A dispute where the Assessing Officer independently computes and adds a disallowance over and above what the assessee has declared, the situation here was the reverse — the higher disallowance originated from the assessee's own return. The Assessing Officer simply accepted that figure without conducting any independent computation or making a separate addition.
The Tribunal's ruling addresses two important dimensions: first, the substantive legal question of whether Section 14A disallowance is capped at the quantum of exempt income actually earned; and second, a procedural question of whether the absence of a revised return filing prevents an assessee from seeking correction of such excessive disallowance through appellate proceedings.
Facts of the Case
During AY 2018-19, Godrej Properties Ltd. earned exempt dividend income amounting to ₹36,227. However, while filing its return of income, the company had declared a suo motu disallowance of ₹12,77,553 under Section 14A of the Income-tax Act, 1961. This disallowance figure was significantly higher than the exempt income actually received during the year.
During assessment proceedings, the assessee raised a specific contention — reportedly through a letter dated 28.02.2021 — that since the exempt dividend income actually earned during the year aggregated to only ₹36,227, the disallowance under Section 14A of the Act ought to be restricted accordingly. The assessee also placed reliance on a Coordinate Bench decision in its own case for Assessment Year 2012-13, wherein the Tribunal had already restricted the Section 14A disallowance to the extent of dividend income actually earned.
The Assessing Officer, however, disregarded this contention and proceeded to accept the suo motu disallowance of ₹12,77,553 as reported by the assessee in the return of income.
The Commissioner (Appeals): Why Relief Was Denied
The matter was carried before the Commissioner of Income-tax (Appeals) / NFAC, Delhi. The CIT(A), vide order dated 20-Feb-2024 bearing DIN: ITBA/NFAC/S/250/2023-24/1061204714(1), rejected the assessee's contention on two grounds:
Suo Motu Disallowance: The CIT(A) noted that the disallowance of ₹12,77,553 was made voluntarily by the assessee itself and no revised return of income had been filed to reduce this amount. In the absence of such a revised return, the CIT(A) declined to substitute the lower figure.
Issue Not Raised Before the Assessing Officer: The CIT(A) further held that since the Assessing Officer had neither discussed this issue in the assessment order nor independently made any addition on this count, there was no occasion for appellate interference.
In essence, the CIT(A)'s approach treated the figure in the original return as final and binding, viewing the appeal as an attempt to walk back a position voluntarily taken by the assessee rather than a legitimate challenge to a departmental adjustment.
Grounds of Appeal Before ITAT Mumbai
Before the Tribunal, Godrej Properties Ltd. raised the following grounds: