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2019 (4) TMI 1738 - HC - Income TaxDisallowance u/s 14A - HELD THAT - Consistently different High Courts in the country have taken a view that the disallowance u/s 14A read with Rule 8D of the Rules cannot exceed the Assessee's exempt income. The Delhi High Court, in the case of Cheminvest Ltd. Vs. Commissioner of Income Tax 2015 (9) TMI 238 - DELHI HIGH COURT has held that when the Assessee has not earned any income which was exempt from tax, disallowance of the expenditure under Section 14A read with 8D of the Rules would not be permissible. Karnataka High Court, in the case of Pragati Krishna Gramin Bank Vs. Joint Commissioner of Income-tax 2018 (6) TMI 1283 - KARNATAKA HIGH COURT has held that expenditure in relation to income not includable in the total income cannot exceed such income. We reverse the decision of the Tribunal to the extent of limiting the disallowance under Section 14A. - Decided in favour of assessee.
Issues:
Challenge to disallowance under Section 14A of the Income Tax Act, 1961 in excess of exempt income earned by the Assessee during the assessment year. Analysis: 1. The appeal was admitted to consider the substantial question of law regarding the correctness of the disallowance under Section 14A of the Income Tax Act, 1961 exceeding the exempt income earned by the Assessee during the relevant assessment year. 2. The Assessee, a private limited company and a non-banking financial company, challenged the disallowance of interest and administrative expenditure under Section 14A of the Act, amounting to a total of &8377; 4,22,72,425, which was confirmed by the Tribunal. 3. The Appellant contended that various High Courts have held that the disallowance under Section 14A cannot exceed the Assessee's exempt income, and if restricted to the exempt income earned, the Assessee would accept the disallowance. 4. Different High Courts in the country have consistently held that the disallowance under Section 14A of the Act cannot exceed the Assessee's exempt income. For instance, the Delhi High Court in Cheminvest Ltd. case stated that disallowance is not permissible when no exempt income is earned. 5. The Karnataka High Court, in Pragati Krishna Gramin Bank case, emphasized that the expenditure related to income not included in the total income cannot surpass that income, highlighting the need for a rational nexus between expenses and income earned. 6. The Gujarat High Court, in Corrtech Energy case, emphasized that disallowance under Section 14A cannot be made if the Assessee did not claim exemption for any income, as observed in the Winsome Textile Industries Ltd. case by the Punjab and Haryana High Court. 7. Referring to recent decisions, the Court reiterated the principle that the disallowance under Section 14A cannot exceed the exempt income earned by the Assessee during the relevant year, even if the Assessee's exempt income is greater than the expenditure incurred. 8. Considering the consistent trend of High Court judgments, the Court ruled in favor of the Assessee, reversing the Tribunal's decision to limit the disallowance under Section 14A to the amount of exempt income earned by the Assessee. 9. Consequently, the Appeal was partially allowed, and the decision of the Tribunal limiting the disallowance was reversed, upholding the principle that the disallowance under Section 14A cannot exceed the Assessee's exempt income.
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