ITAT Chennai: Fresh Section 14A Disallowance Cannot Be Introduced Through Section 154 Rectification Proceedings

Overview of the Dispute

A significant ruling has emerged from the Income Tax Appellate Tribunal, Chennai Bench, in the matter of Family Health Plan Insurance TPA Limited Vs DCIT (ITA No. 2366/Chny/2026), decided on 08.09.2026 for Assessment Year 2018-19. The Tribunal categorically held that the Assessing Officer ("AO") lacked the jurisdiction to invoke Section 154 of the Income-tax Act, 1961 for the purpose of introducing a fresh disallowance of ₹35,37,216 under Section 14A read with Rule 8D of the Income-tax Rules, 1962, particularly when the original scrutiny assessment completed under Section 143(3) had not made any such disallowance whatsoever.

The rectification order dated 27.03.2025, which had been upheld by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, was quashed by the Tribunal to the extent of the fresh addition, and the AO was directed to recompute the total income after deleting the said disallowance of ₹35,37,216.

Background and Chronology of Events

Original Return and Scrutiny Assessment

The assessee filed its original return of income on 27.09.2018, followed by a revised return on 28.09.2018, declaring a total income of ₹8,95,07,700. The case was selected for scrutiny, and the assessment was completed under Section 143(3) read with Section 143(3A) and Section 143(3B) vide order dated 29.03.2021. It was undisputed that no disallowance under Section 14A was made in this scrutiny assessment.

First Rectification Order

An inadvertent addition of ₹2,77,97,117 had crept into Schedule BP in the computation of income. This error was corrected by the AO through a rectification order under Section 154 read with Section 143(3) dated 19.08.2021, and total income was redetermined at ₹8,95,07,697. Significantly, even this rectification order did not introduce any disallowance under Section 14A.

Second Rectification — The Subject of the Present Appeal

Subsequently, the AO noticed the following from the return of income:

  • The assessee had earned exempt dividend income of ₹1,10,77,100 during the year.
  • No disallowance under Section 14A had been made.
  • The assessee held investments in shares, including:
    • Investment in Apollo Hospitals Enterprises Ltd. of ₹1,06,26,500 made during the year.
    • Investment in Keimed Pvt. Ltd. of ₹34,88,51,110 made in an earlier year.

On the basis of the above observations, the AO proceeded to compute a disallowance of ₹35,37,216 under Section 14A read with Rule 8D and passed an order dated 27.03.2025 under Section 154 read with Section 143(3), redetermining total income at ₹9,30,44,913.

Grounds Raised by the Assessee Before ITAT

The assessee raised the following substantive grounds before the Tribunal:

  1. Ground I: The rectification order under Section 154 read with Section 143(3) was bad in law, since the disallowance under Section 14A read with Rule 8D directly introduced in rectification proceedings could not constitute a "mistake apparent from the record."

  2. **Ground II (Without Prejudice)😗* The disallowance of ₹35,37,216 under Section 14A read with Rule 8D was bad in law on merits.

  3. **Ground III (Without Prejudice)😗* Even if such disallowance were to be computed, it should be restricted only to investments that actually yielded exempt income during the relevant year.

  4. **Ground IV (Without Prejudice)😗* The computation under Rule 8D should be based on the actual cost of investments rather than the fair market value thereof.

Arguments Advanced by the Parties

Submissions on Behalf of the Assessee

The learned counsel for the assessee contended that: