2016 (7) TMI 1597 - AT - Income Tax

Disallowance u/s.14A r.w.r. 8D - HELD THAT - Window for disallowance u/s.14A of the Act is only to the extent of a portion of the tax exempt income and could not swallow the entire amount. If the contention of the Revenue is accepted disallowance would be much more than the claim of exempt income. As relying on Joint Investments P. Ltd 2015 (3) TMI 155 - DELHI HIGH COURT this is patently incorrect. Maximum amount that could have been disallowed u/s.14A and nothing more. Assessee is given relief to this extent.

Summary

Issues: Disallowance u/s.14A of the Income-tax Act, 1961 r.w.Rule 8D

Analysis:
The appeal filed by the assessee challenged the disallowance of ?4,02,442/- made under section 14A of the Income-tax Act, 1961, with reference to Rule 8D, which was upheld by the CIT (A). The assessee had investments in mutual funds amounting to ?3,00,67,074/- and earned dividends of ?67,074/- during the relevant year, claimed as exempt u/s.10(34) of the Act. The Assessing Officer (AO) calculated a disallowance of ?4,02,440/- based on Rule 8D, despite the assessee's claim that the entire expenditure was capitalized and no disallowance should be made. The CIT (A) also ruled against the assessee in the appeal. The Authorized Representative (AR) argued that the disallowance u/s.14A could not exceed the exempt income, citing a judgment of the Hon'ble Delhi High Court in a specific case. The Dispute Resolution (DR) supported the lower authorities' decision.

The Tribunal examined the orders and arguments presented. It was acknowledged that the assessee only claimed exemption for ?67,074/-, the dividend received from mutual fund investments. Referring to the judgment of the Hon'ble Delhi High Court, the Tribunal noted that the disallowance under section 14A should only be to the extent of the expenditure related to the tax-exempt income. The Court emphasized that the disallowance cannot exceed the tax-exempt income itself. Consequently, the Tribunal set aside the ITAT's order, ruling in favor of the assessee and directing fresh consideration by the AO in line with the Court's directions. The Tribunal highlighted that the maximum disallowance under section 14A should be restricted to the amount of exempt income, not surpassing it.

In conclusion, the Tribunal partially allowed the assessee's appeal, emphasizing that the disallowance under section 14A should be limited to the portion of tax-exempt income and cannot exceed the exempt income itself. The judgment of the Hon'ble Delhi High Court played a crucial role in determining the correct interpretation of section 14A and Rule 8D in relation to disallowances.