2016 (11) TMI 1652 - AT - Income Tax

Disallowance u/s. 14A - whether the disallowance u/s. 14A could exceed the exempt income derived by the assessee? - HELD THAT - Provisions of section 14A of the Act are very clear in considering expenditure which were incurred for earning any income which do not form part of total income. So going by the plain language of the section it could be safely concluded that the legislature intended only to disallow the expenditure that were incurred for earning exempt income. The legislature never intended to disallow the expenditure which is more than the exempt income derived by the assessee. We also draw support from the decision of the Hon ble Delhi High Court in the case of Joint Investments Pvt. Ltd. Vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT wherein it has been held that the disallowance u/s. 14A of the Act cannot exceed the exempt income. Respectfully following the said decision we direct the AO to restrict the disallowance u/s. 14A of the Act to 102/- and allow the ground of appeal raised by the assessee. Appeal of the assessee is allowed.

Summary

Issues:
Whether the disallowance under section 14A of the Income Tax Act could exceed the exempt income derived by the assessee.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata pertained to the disallowance under section 14A of the Income Tax Act, where the Assessing Officer had made a disallowance of &8377; 9,15,508 based on Rule 8D of the IT Rules, as the assessee had substantial investments in shares and received dividend income of &8377; 102. The CIT(A) directed the AO to calculate the disallowance at 0.5% of the average value of investments yielding exempt income, in line with a previous Tribunal decision. The assessee appealed this direction, arguing that the disallowance should not exceed the exempt income of &8377; 102. Despite the absence of the assessee during the proceedings, the Departmental Representative contended that the disallowance should be limited to 0.5% of the average value of investments without a cap on exceeding the exempt income, citing a previous ITAT decision.

The Tribunal analyzed the provisions of section 14A of the Act, emphasizing that only expenditures incurred for earning exempt income should be disallowed. The Tribunal referred to a decision of the Hon'ble Delhi High Court, which held that the disallowance under section 14A cannot surpass the exempt income. Relying on this precedent, the Tribunal concluded that the legislature did not intend to disallow expenditures exceeding the exempt income. Consequently, the Tribunal directed the Assessing Officer to restrict the disallowance under section 14A to the amount of exempt income, which was &8377; 102 in this case. Therefore, the Tribunal allowed the ground of appeal raised by the assessee, emphasizing the limitation on disallowance to the extent of exempt income.

In conclusion, the Appellate Tribunal ITAT Kolkata ruled in favor of the assessee, restricting the disallowance under section 14A of the Income Tax Act to the amount of exempt income received by the assessee, in line with the legislative intent and judicial precedents, thereby providing clarity on the permissible extent of disallowance in such cases.