2018 (5) TMI 1748 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D - Held that - As seen from the order of the AO as well as the CIT(A), there is no fin ding that assessee has incurred any expenditure for earning the said dividend income. There was no diversion of borrowed funds, hence there is no disallowance interest under Rule 8D(2)(ii). Coming to disallowance under Rule 8D(2)(iii) disallowance of % of average value of investment, some proportionate expenditure can be disallowed but in no case, it should exceed the amount earned claiming exemption - the disallowance under Rule 8D cannot exceed the dividend income earned and claimed as exempt. Therefore, the disallowance worked out under Rule 8D(iii) being administrative expenditure is restricted to the amount of dividend earned. AO is directed to modify accordingly. Ground is partly allowed.

Summary

Issues:
- Disallowance u/s. 14A of the Income Tax Act

Detailed Analysis:
1. The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance u/s. 14A of the Income Tax Act.
2. The assessee, engaged in the business of manufacturing PP Woven Sacks and Pet Preforms, filed its return of income for AY 2013-14, declaring a loss under normal provisions and a book profit. The Assessing Officer (AO) made a disallowance u/s. 14A of the Act, disallowing 0.5% of the average investments.
3. The CIT(A) confirmed the disallowance, stating that the appellant had not established that the investments were not intended for earning exempt income, and thus, 0.5% of the average value of investments was considered for disallowance under Rule 8D(2)(iii).
4. The assessee contended that no expenditure was incurred as the investment was made in a group concern. The assessee sought to restrict the disallowance to the dividend earned only, citing various case laws.
5. The DR relied on the orders of the CIT(A).
6. The Tribunal observed that there was no finding that the assessee had incurred any expenditure for earning the dividend income, and the disallowance was only under Rule 8D(2)(iii). The Tribunal referred to various judgments and held that the disallowance under Rule 8D cannot exceed the dividend income earned and claimed as exempt. The disallowance was restricted to the amount of dividend earned, directing the AO to modify the disallowance accordingly.
7. The appeal of the assessee was partly allowed based on the above analysis.

This detailed analysis covers the issues involved in the legal judgment regarding the disallowance u/s. 14A of the Income Tax Act, providing a comprehensive understanding of the case and the reasoning behind the decision.