2018 (6) TMI 1627 - AT - Income Tax

Disallowance u/s 14A - claim restricted to the exempt income earned by the assessee - HELD THAT - Hon ble Delhi High Court in the case of Joint Investments (P) Ltd. v. CIT 2015 (3) TMI 155 - DELHI HIGH COURT has taken the view that disallowance u/s. 14A cannot exceed the exempt income. Similar view was expressed by the Hon ble Delhi High Court in the case of CIT v. Holcim India Pvt. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT . These decisions were considered by the Mumbai Bench of the Tribunal in the case of Future Corporate Resources Ltd v. ACIT 2017 (9) TMI 805 - ITAT MUMBAI relating to AY 2011-12 and it was held by the Tribunal Mumbai Bench that disallowance u/s. 14A of the Act cannot exceed the exempt income. Following the aforesaid decisions we hold that disallowance u/s. 14A in the present case should be restricted to the exempt income earned by the assessee. - Appeal of the assessee is partly allowed

Summary

Issues: Disallowance of expenses incurred in earning exempt income under section 14A of the Income-tax Act, 1961.

The judgment by the Appellate Tribunal ITAT Bangalore dealt with an appeal concerning the disallowance of expenses incurred in earning exempt income under section 14A of the Income-tax Act, 1961. The assessee, a financial intermediary services company, had earned dividend income not chargeable to tax under section 10(34) of the Act. The dispute centered around the computation of disallowance under section 14A. The assessee had voluntarily disallowed a certain sum as expenditure to earn exempt income, while the Assessing Officer calculated a different disallowance based on the average value of investments. The assessee argued that investments made for strategic reasons should not be considered for the disallowance calculation. However, the CIT(Appeals) disagreed, holding that strategic investments must be included as per Rule 8D(2)(iii) of the Rules. The CIT(Appeals) also rejected the argument that the disallowance cannot exceed the exempt income earned.

Upon appeal to the Tribunal, it was noted that the Hon'ble Delhi High Court had ruled that disallowance under section 14A cannot surpass the exempt income earned. Citing relevant decisions, the Tribunal held that the disallowance should be limited to the exempt income earned by the assessee. Consequently, the Tribunal partially allowed the appeal, directing that the disallowance under section 14A should not exceed the exempt income. The judgment emphasized the principle that the disallowance of expenses incurred in earning exempt income should be restricted to the amount of exempt income earned, aligning with judicial precedents.