2018 (5) TMI 1869 - AT - Income Tax

Disallowance u/s 14A - CIT (A) in restricting the disallowance to exempt income earned during the year which according to the Revenue is contrary to Board Circular No.5/2014 - HELD THAT - As in case of ACB India Ltd vs. Asstt. CIT 2015 (4) TMI 224 - DELHI HIGH COURT clearly held that the disallowance u/s 14A cannot exceed the exempt income earned by the assessee. In similar cases the Coordinate Benches of this Tribunal have been following the decisions of various High Courts to the effect that when there is no exempt income there cannot be any disallowance u/s 14A of the Act and further that the disallowance u/s 14A cannot exceed the exempt income earned by the assessee. Therefore we see no reason to interfere with the order of the CIT (A). - Decided against revenue.

Summary

Issues:
Appeal against CIT (A) order restricting disallowance u/s 14A to exempt income earned during AY 2011-12.

Analysis:
The Revenue filed an appeal against the CIT (A) order for the AY 2011-12, challenging the restriction of disallowance u/s 14A to the extent of exempt income earned during the year. The dispute arose from the AO's observation of investments made by the assessee in companies amounting to ?48,64,11,000 as of 31.03.2011, resulting in exempt dividend income. The AO applied Rule 8D to calculate a disallowance of ?4,42,90,857, which the CIT (A) limited to the exempt income earned by the assessee. The Revenue contended that the CIT (A)'s decision contradicted Board Circular No.5/2014.

During the proceedings, the learned DR supported the AO's order, citing the decision of a Coordinate Bench in the case of Lally Motors India (P) Ltd. Conversely, the assessee's counsel relied on judgments such as the Hon'ble Delhi High Court's decision in Jt. Investments (P) Ltd vs. CIT and ITAT Hyderabad's rulings in various cases. After considering the arguments and case law, the Tribunal found in favor of the assessee, citing the Hon'ble Delhi High Court's decision that the disallowance u/s 14A cannot exceed the exempt income earned. The Tribunal noted that when there is no exempt income, there should be no disallowance u/s 14A, and the disallowance cannot surpass the exempt income. Consequently, the Tribunal upheld the CIT (A)'s order, dismissing the Revenue's appeal.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT (A)'s decision to restrict the disallowance u/s 14A to the extent of exempt income earned during the AY 2011-12. The judgment was pronounced on 25th May 2018 by Smt. P. Madhavi Devi, Judicial Member, and Shri B. Ramakotaiah, Accountant Member.