No Exempt Income, No Section 14A Disallowance: Bombay High Court Upholds Deletion of ₹17.57 Crore in HCC Concessions Case
Can Section 14A Disallowance Survive When No Exempt Income Is Earned?
Can the Assessing Officer make a substantial disallowance under Section 14A of the Income-tax Act, 1961, read with Rule 8D, even when the assessee has not earned any exempt income during the relevant assessment year?
The Bombay High Court has once again reaffirmed the importance of this principle in Pr. Commissioner of Income Tax-15, Mumbai v. HCC Concessions Ltd., dismissing the Revenue’s appeal against deletion of a disallowance of ₹17.57 crore.
The Court held that the concurrent factual findings of the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT), Mumbai, did not give rise to any substantial question of law under Section 260A of the Income-tax Act.
The decision also reiterates that where no exempt income has been earned during the relevant year, a disallowance under Section 14A cannot be sustained on the facts of the case.
Background of the Case
HCC Concessions Ltd. is engaged in infrastructure development activities, both directly and through its subsidiaries.
For Assessment Year 2012-13, the Assessing Officer passed an assessment order dated 13 March 2015 and made a disallowance of ₹17,57,51,160 under Section 14A read with Rule 8D.
The Assessing Officer treated the expenditure as having been incurred in relation to income which did not form part of the total income.
The assessee challenged the disallowance before the CIT(A).
By order dated 10 August 2016, the CIT(A) deleted the disallowance, holding that the Assessing Officer was not justified in making the addition.
The Revenue carried the matter before the ITAT, Mumbai.
The ITAT, by order dated 3 January 2018, upheld the deletion. It noted that the assessee had not earned any exempt income during the relevant assessment year. It also observed that the assessee’s own funds were in excess of the investments made.
The Tribunal relied upon the decision of the Delhi High Court in Cheminvest Ltd. v. CIT (2015) 378 ITR 33.
Aggrieved by the Tribunal’s order, the Revenue filed an appeal before the Bombay High Court under Section 260A of the Income-tax Act.
Revenue’s Argument: CBDT Circular No. 5/2014
Before the High Court, the Revenue challenged the deletion of the disallowance of ₹17.57 crore.
One of the principal arguments was based on CBDT Circular No. 5/2014 dated 11 February 2014.
The Revenue contended that the Circular clarified that disallowance under Section 14A read with Rule 8D was required even where the assessee had not earned exempt income during the relevant year.
The Revenue therefore sought interference with the Tribunal’s order and restoration of the disallowance made by the Assessing Officer.
The controversy before the High Court was not merely about the quantum of disallowance. It also involved the scope of appellate jurisdiction under Section 260A, which permits an appeal to the High Court only where a substantial question of law arises.
Bombay High Court’s Observations
The Bombay High Court, comprising Justice Suman Shyam and Justice Gautam A. Ankhad, heard the appeal at the admission stage.
1. Section 260A Is Confined to Substantial Questions of Law
The Court observed that its jurisdiction under Section 260A of the Income-tax Act is confined to substantial questions of law arising from the order of the Tribunal.
In determining what constitutes a substantial question of law, the Court referred to the principles laid down by the Supreme Court in:
Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., AIR 1962 SC 1314;
Vijay Kumar Talwar v. CIT, (2011) 1 SCC 673.
The Court held that the questions framed by the Revenue were essentially based on facts and did not give rise to a substantial question of law warranting exercise of jurisdiction under Section 260A.
2. Concurrent Findings of CIT(A) and ITAT Were Not Perverse
The CIT(A) and the ITAT had concurrently found that the assessee did not earn any exempt income during Assessment Year 2012-13.
The High Court noted that the Revenue had not demonstrated that these findings were unsupported by the material on record or were perverse.
In the absence of any such infirmity, the concurrent factual findings did not warrant interference in an appeal under Section 260A.
This aspect is important because a factual finding by the lower appellate authorities does not ordinarily become open to reconsideration by the High Court unless a substantial question of law arises from it.
3. Legal Issue Was Already Covered by Nirved Traders
The assessee also relied upon the Bombay High Court’s decision in Nirved Traders Pvt. Ltd. v. DCIT, Income Tax Appeal No. 149 of 2017, dated 23 April 2019.
In that decision, the Bombay High Court had considered the issue concerning disallowance under Section 14A in the absence of exempt income and had decided the matter in favour of the assessee.
The High Court in HCC Concessions agreed with the assessee’s submission that the legal issue sought to be raised by the Revenue did not survive for consideration in view of the earlier decision.
Accordingly, the Revenue’s appeal was dismissed at the admission stage.
CBDT Circular Cannot Sustain the Disallowance in the Facts of the Case
The Revenue’s reliance on CBDT Circular No. 5/2014 did not result in restoration of the disallowance.
The High Court’s decision was based on two important considerations:
The concurrent factual finding that no exempt income had been earned during the relevant assessment year;
The legal issue being covered by the Bombay High Court’s earlier decision in Nirved Traders Pvt. Ltd.
The judgment thus reinforces the principle that the application of Section 14A must be considered in the context of the relevant facts and the binding judicial precedents.
Practical Implications for Taxpayers and Tax Practitioners
1. No Exempt Income Is a Crucial Fact
Where an assessee has not earned exempt income during the relevant assessment year, the applicability of Section 14A should be carefully examined.
The absence of exempt income was a decisive factual consideration in the HCC Concessions case.
2. Investment Does Not Automatically Justify Disallowance
The mere existence of investments does not, by itself, conclude the issue of disallowance under Section 14A.
In this case, the ITAT had also recorded that the assessee’s own funds exceeded the investments made.
3. Concurrent Findings Have Significant Weight
Where the CIT(A) and ITAT have arrived at concurrent findings of fact, the Revenue must demonstrate an appropriate legal infirmity to secure interference under Section 260A.
A mere disagreement with the factual conclusions may not be sufficient.
4. Section 260A Is Not a Routine Reassessment of Facts
The High Court’s jurisdiction under Section 260A is not equivalent to a second factual appeal.
The appeal must involve a substantial question of law. This distinction is particularly important in income-tax litigation involving factual findings on expenditure, investments and exempt income.
Conclusion
The Bombay High Court’s decision in Pr. Commissioner of Income Tax-15 v. HCC Concessions Ltd. provides further support to the proposition that Section 14A disallowance cannot be sustained in the absence of exempt income, where the relevant facts and applicable judicial precedents support the assessee.
The deletion of ₹17,57,51,160 was left undisturbed. The Court also emphasised that concurrent findings of the CIT(A) and ITAT, when not shown to be perverse or unsupported by the record, do not warrant interference under Section 260A.
For taxpayers and tax practitioners, the ruling underscores the importance of examining the actual exempt income earned during the year, the source of funds used for investments, and the scope of appellate jurisdiction before contesting a Section 14A disallowance.
Case Citation
Case Name: Pr. Commissioner of Income Tax-15, Mumbai v. HCC Concessions Ltd.
Court: Bombay High Court
Appeal No.: Income Tax Appeal No. 2702 of 2018
Assessment Year: 2012-13
Date of Order: 30 October 2026
Relevant Provisions: Section 14A, Section 260A of the Income-tax Act, 1961 and Rule 8D of the Income-tax Rules, 1962
Amount of Disallowance: ₹17,57,51,160
Result: Revenue’s appeal dismissed at the admission stage
Key Takeaway: Where no exempt income is earned during the relevant year, Section 14A disallowance may not be sustainable. Further, concurrent factual findings of the CIT(A) and ITAT cannot be disturbed under Section 260A unless a substantial question of law arises.
The copy of the order is as under:
