2018 (3) TMI 1718 - HC - Income Tax

Disallowance u/s 14A - HELD THAT - Assessee had offered 10, 46, 264/- as a disallowance under Section 14A of the Act towards interest free income. AO however rejected the amount and made a disallowance of over 4.13 crores approximately upon application of Rule 8D(2)(ii) and 8D(2)(iii). CIT(A) restricted the disallowance amounting to 9, 00, 621/-by holding that the application of Rule 8D(2)(ii) of the Act was not called for. ITAT confirmed that order. This Court has considered the Revenue s submissions. Clearly the AO had fallen into error in overlooking that the assessee had deployed its own substantial part of funds to derive a tax exempt income. In these circumstances the findings of the lower Appellate Authorities are justified.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.

Analysis:
The judgment revolves around the disallowance under Section 14A of the Income Tax Act, 1961. The appellant had initially offered a certain amount as disallowance, which was rejected by the Assessing Officer (AO) who made a substantial disallowance using Rule 8D(2)(ii) and 8D(2)(iii). The CIT(A) later restricted the disallowance, which was further confirmed by the ITAT. The Revenue contested the decision, arguing that the disallowance should not have been set aside.

The High Court examined the submissions and found that the AO erred in disregarding the fact that the assessee had utilized a significant portion of its funds to generate tax-exempt income. Consequently, the Court upheld the findings of the lower Appellate Authorities, deeming them justified in the given circumstances.

Ultimately, the Court concluded that no substantial question of law arose from the case, leading to the dismissal of the appeal and any pending application. The judgment highlights the importance of considering the source of funds when determining disallowances under Section 14A of the Income Tax Act, ensuring a fair and accurate assessment of tax liability.