2015 (10) TMI 2787 - AT - Income Tax

Disallowance u/s 14A - Assessee submitted disallowance cannot exceed the amount of dividend income - HELD THAT - As relying on JOINT INVESTMENTS PVT LTD VERSUS COMMISSIONER OF INCOME TAX 2015 (3) TMI 155 - DELHI HIGH COURT by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax-exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax-exempt income . This proportion or portion of the tax-exempt income surely cannot swallow the entire amount as has happened in this case. Respectfully following the decision of Hon ble High Court, direct for restricting the disallowance u/s 14A to ₹ 28,55,485/-. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A - Whether the disallowance can exceed the amount of dividend income earned during the year under assessment.

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi involved a dispute regarding the disallowance under section 14A of the Income Tax Act. The assessee, engaged in finance and leasing, had declared a loss of &8377; 1,82,92,936, while earning dividend income of &8377; 28,55,485. The Assessing Officer (AO) computed the disallowance under section 14A at &8377; 1,73,65,881, reducing the total loss to &8377; 9,27,055. The Commissioner of Income Tax (Appeals) dismissed the assessee's appeal, leading to the appeal before the ITAT.

Upon hearing the case, the Tribunal noted that the assessee contended that the disallowance under section 14A cannot exceed the amount of dividend income earned during the assessment year. The assessee relied on a decision of the Hon'ble Delhi High Court in the case of Joint Investments Pvt. Ltd. Vs. CIT. The High Court in that case observed that the disallowance under section 14A should be restricted to the amount of dividend income earned by the assessee. The High Court emphasized that the disallowance should not exceed the expenditure "incurred by the assessee in relation to the tax-exempt income."

Considering the High Court's decision, the ITAT directed to restrict the disallowance under section 14A to the amount of dividend income earned, which was &8377; 28,55,485 in this case. The Tribunal partially allowed the assessee's appeal, thereby setting aside the excessive disallowance made by the AO and the CIT(A). The judgment provided clarity on the interpretation of section 14A and emphasized the need for a proportionate disallowance based on the tax-exempt income earned by the assessee.