ITAT Delhi Upholds Deletion of Rs. 2.13 Crore Section 14A Disallowance on Mutual Fund Investments

ITAT Delhi dismissed the tax department’s appeal for AY 2018-19, upholding the deletion of Rs. 2.13 crore section 14A disallowance on mutual funds, and confirming that section 143(1) CPC issues must be challenged separately, as held by the tribunal.

The present case has been filed by the Income Tax Department in the ITAT Delhi against a company named Outsourcepartners International Private Limited, challenging an order dated October 24, 2024, passed by the CIT(A)/NFAC. The case is related to the assessment year 2018-19. The impugned order had deleted the disallowance of Rs. 2.13 crore, made by the Assessing Officer (AO) vide assessment order dated September 27, 2021, under section 14A and Rule 8D. The disallowance was initially applied to the assessee’s mutual fund investments.

The Assessing Officer argued that expenses should be disallowed even though the assessee’s income was exempt. However, the CIT(A)/NFAC discovered that the disallowance was not justified because the Growth Plan investments generated taxable capital gains, not exempt income, and the Daily Dividend Plan investments were redeemed within the same month, making the Rule 8D calculation inapplicable.

Now, the revenue has challenged the same deletion of Rs. 2.13 disallowance before the tribunal. When the tribunal analysed the facts of the case, it agreed with the ruling of CIT(A)/NFAC and dismissed the Revenue’s appeal, confirming that the section 14A disallowance could not be applied here.

The assessee had also filed a cross appeal before the tribunal challenging the order of the CIT(A)/NFAC, wherein it raised the key argument that the CIT(A)/NFAC had failed to address certain grounds related to disallowances under section 143(1) processing by the CPC. When the tribunal examined the cross appeal, it noted that the appeals against section 143(1) processing should have been filed separately under section 246A(1)(a), and hence the decision of the CIT(A)/NFAC to not decide these grounds was justified. Accordingly, the tribunal dismissed both the tax department’s and the assessee’s appeals, sustaining the lower appellate authority’s findings.