2016 (12) TMI 1748 - AT - Income Tax

Disallowance under Rule 8D r.w.s. 14A - Held that - As learned counsel for the assessee rightly points out, the disallowance under section 14A cannot exceed the related tax exempt income during the relevant previous year. This is what co-ordinate benches have consistently held to be the correct legal position. See AUSOM INTERNATIONAL P. LTD. VERSUS ITO, WD-1 (3) , AHMEDABAD 2016 (5) TMI 531 - ITAT AHMEDABAD We hold that the disallowance under section 14A must stand restricted to ₹ 8,01,136/-. To this extent, the Cross Objection is allowed, and the relief granted by the CIT(A) is confirmed.

Summary

Issues:
Challenge to order under section 143(3) of the Income Tax Act, 1961 for assessment year 2008-09. Disallowance under section 14A of the Act.

Analysis:
1. The Assessing Officer challenged the order of the learned CIT(A) regarding the correctness of the assessment under section 143(3) for the assessment year 2008-09. The Assessing Officer made an addition of ?2,19,20,337 on account of disallowance under section 14A of the Act. The CIT(A) restricted the disallowance to ?20,37,982, considering that the appellant's interest expenses were attributable to the construction business, and no disallowance under Rule 8D(2)(ii) was required. However, disallowance for administrative expenses under Rule 8D(2)(iii) was confirmed. This decision was based on the fact that the disallowance under section 14A cannot exceed the related tax-exempt income during the relevant year.

2. The co-ordinate bench decisions in similar cases were cited to support the restriction of disallowance under section 14A to the extent of exempt income earned by the assessee. The bench held that disallowance under section 14A cannot exceed the exempt income. In cases where the assessee is engaged in the business of trading shares and the profit is shown under the head "income from business," disallowance under section 14A does not apply. The interest expenses incurred for the purchase of shares and units should be treated as business expenses. The disallowance under section 14A should be limited to the extent of exempt income earned by the assessee.

3. The tribunal upheld the decision to restrict the disallowance under section 14A to ?8,01,136, in line with the co-ordinate bench's previous rulings. The tribunal confirmed the relief granted by the CIT(A) and dismissed the appeal while partly allowing the Cross Objection.

In conclusion, the tribunal's decision aligned with the principle that disallowance under section 14A should not exceed the exempt income earned by the assessee, considering the specific circumstances and legal precedents cited in similar cases.