2018 (4) TMI 1804 - AT - Income Tax

Disallowance u/s 14A - assessee has earned exempt income u/s 10 from the investment in shares and mutual funds - CIT-A restricted the addition - HELD THAT - As decided in own case 2015 (11) TMI 1668 - ITAT CHANDIGARH no agreement with the proposition that the Rule 8D of the Rules being mandatory, disallowance as per Rule 8D has be made even in cases where no tax free income has ,ed or where tax free income earned is lesser than the nt computed as per Rule 8D of the Rules. Proposition laid down by various High Courts as mentioned hereinabove is applicable in the present case with full force. In view of this, we direct the Assessing Officer to limit the disallowance made under section 14A of the Act read with Rule 8D of the Rules to the amount of tax free income earned by the assessee - we direct the Assessing Officer to limit the disallowance to the amount of tax free income earned - Decided against revenue.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961, r.w. Rule 8D(ii).

Analysis:
The appeal was filed by the Revenue against the order of the Ld. CIT(A)-2, Ludhiana regarding the disallowance under section 14A of the Income Tax Act, 1961, r.w. Rule 8D(ii). The Revenue raised the issue of whether the Ld. CIT(A) was justified in deleting the disallowance. The assessee company, engaged in cotton and polyester yarn manufacturing, earned dividend income during the year. The Assessing Officer added a significant amount to the income of the assessee under section 14A r.w.r. 8D of Income Tax Rule, 1962 due to exempt income earned under section 10 of the Income Tax Act, 1961.

The Ld. CIT(A) restricted the addition to a nominal amount based on a previous decision by ITAT, Chandigarh in a similar case. The argument presented by the Ld. DR emphasized the automatic application of Section 14A Rule 8D, stating that expenses are incurred once investments are made, irrespective of income earned. Conversely, the Ld. AR argued that the disallowance should not exceed the tax-free income earned by the assessee. The Tribunal considered the arguments and referred to previous judgments by Delhi High Court, Gujarat High Court, and Punjab & Haryana High Court, which established that if no tax-free income is earned, disallowance under section 14A cannot be made. The Tribunal disagreed with the notion that Rule 8D is mandatory in all cases, emphasizing that disallowance should be limited to the tax-free income earned by the assessee.

As a result, the Tribunal directed the Assessing Officer to restrict the disallowance to the amount of tax-free income earned by the assessee, leading to the dismissal of the Revenue's appeal. The judgment highlighted the importance of considering the actual tax-free income earned by the assessee when determining the disallowance under section 14A of the Income Tax Act, 1961, r.w. Rule 8D(ii).