ITAT Mumbai Rejects Section 14A Addition For Lack Of Recorded Satisfaction, Upholds Suo Motu Disallowance

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 22 April held that an assessing officer cannot invoke Rule 8D under Section 14A of the Income Tax Act without recording dissatisfaction with the taxpayer's suo motu disallowance.

Judicial Member Sandeep Gosain and Accountant Member Girish Agrawal dismissed the Revenue's appeal and partly allowed Trent Limited's appeal for Assessment Year 2016–17, holding that brand equity fees paid to Tata Sons Ltd. are deductible under Section 37(1). The Bench stated:

“We find that these grounds of appeal are covered in favour of assessee, wherein on similar set of fact, the suo moto disallowance under section 14A of assessee was accepted.”

The Tribunal heard cross appeals arising from an order of the National Faceless Appeal Centre dated 30 June 2025. The Revenue challenged relief granted on Section 14A disallowance and allowance of brand equity fees, while Trent challenged disallowance of its claim on discounts on unredeemed gift cards and vouchers.

On Section 14A, the Tribunal noted that coordinate Benches had already accepted Trent's suo motu disallowance in earlier years. It reiterated that the Assessing Officer had not recorded satisfaction before invoking Rule 8D. The Bench also held that Section 14A disallowance cannot be added while computing book profits under Section 115JB.

On brand equity fees, the Tribunal referred to the agreement dated 23 December 1999 with Tata Sons Ltd. for use of brand names and marketing indicia. It noted that similar payments within the Tata group had consistently been allowed as revenue expenditure under Section 37(1) and upheld the deduction in the absence of any contrary material from the Revenue. It observed:

“We find that assessee has paid brand equity fees to Tata Sons pursuant to brand agreement dated 23.12.1999. The existence of such agreement is not disputed by assessing officer.”

On gift cards and vouchers, the Tribunal held that discounts on unredeemed gift cards crystallise at the time of sale and are not contingent on redemption. It rejected the Department's stand that liability arises only upon use.

Relying on Taparia Tools Ltd. v. Joint Commissioner of Income Tax, it reiterated that revenue expenditure is allowable in the year it is incurred and cannot be deferred at the Revenue's discretion.

The Bench also noted that Trent offers unutilised gift card value to tax upon expiry and accordingly granted relief, setting aside the lower authorities' view. It further directed recomputation of book profits under Section 115JB after giving effect to relief on sales promotion discount and Club West loyalty programme expenditure.

Accordingly, the ITAT dismissed the Revenue's appeal and partly allowed Trent's appeal.