2016 (2) TMI 919 - AT - Income Tax

Disallowance u/s 14A - Held that - We find force in the submissions of the assessee that only those investments which would yield dividend and which is exempt should be considered for disallowance under Rule 8D(2)(iii). We also hold that the disallowance under section 14A should not exceed the dividend income earned by the assessee. We direct the AO to recompute the disallowance taking only those investments which yield dividend income and apply Rule 8D(2)(iii) and such disallowance should not exceed the dividend income earned by the assessee. Decided in favour of assessee for statistical purpose.

Summary

Issues:
Disallowance of expenditure under Sec. 14A of the Act based on dividend income received by the assessee for assessment year 2008-09.

Analysis:
The appeal was filed by the assessee against the order of the Ld. CIT(A)-41, Mumbai dated 10.10.2011 regarding the disallowance of expenditure under Sec. 14A of the Act. Despite notice, no one appeared on behalf of the assessee, leading to an ex parte disposal of the matter. The AO disallowed &8377; 39,63,654 as expenditure attributable to earning dividend income under Sec. 14A. The Ld. CIT(A) upheld this disallowance based on Rule 8D(2)(iii), calculating 0.5% of the average value of investments in the balance sheet. However, the assessee argued that only investments yielding dividend income should be considered for disallowance, not the total investments as done by the AO.

The assessee contended that the disallowance should not exceed the actual dividend income earned, which was &8377; 21,57,188. The Ld. CIT(A) did not address this argument. The ITAT found merit in the assessee's submission that only investments generating dividend income should be considered for disallowance under Rule 8D(2)(iii). Moreover, it was held that the disallowance under Sec. 14A should not surpass the actual dividend income received by the assessee. Consequently, the AO was directed to recompute the disallowance, limiting it to investments yielding dividend income and ensuring it does not exceed the actual dividend income earned.

In conclusion, the appeal filed by the assessee was treated as allowed for statistical purposes, with the order pronounced on 24th February 2016 by the ITAT Mumbai.