2018 (8) TMI 2024 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - quantum of the amount of disallowance u/s 14A - HELD THAT - There is no dispute about the applicability of the provisions of section 14A. Now the law is quite settled that the disallowance u/s 14A cannot exceed exempt income. In support of this view reliance can be placed on the ITAT, Hyderabad Special Bench in the case of ACIT vs. M/s. Progressive Constructions Pvt Ltd ( 2017 (3) TMI 1167 - ITAT HYDERABAD - Similarly in the light of the decision of the Delhi Special Bench decision in the case of ACIT vs. Vireet Investments Pvt Ltd. 2017 (6) TMI 1124 - ITAT DELHI the value of investment which yielded exempt income alone be considered for the purpose of computing the average value of the investments for the purpose of quantifying the amount of disallowance u/s 14A. We find that the order of the CIT(A) is in consonance with the ratios laid down by the Special Benches and therefore, we do not find any reason to interfere with the order of the CIT(A). Accordingly, grounds raised by the Revenue are dismissed.

Summary

Issues involved:
- Disallowance under section 14A of the Income Tax Act
- Interpretation of Rule 8D for computation of disallowance
- Applicability of disallowance even in absence of exempt income

Analysis:

1. Disallowance under section 14A of the Income Tax Act:
The case involved an appeal by the revenue against the order of the CIT (A) regarding disallowance made under section 14A of the Income Tax Act for the assessment year 2013-14. The Assessing Officer had disallowed a certain amount under section 14A read with Rule 8D, which was contested by the assessee before the CIT (A). The core issue revolved around the quantum of disallowance under section 14A, specifically whether it can exceed the exempt income earned by the assessee.

2. Interpretation of Rule 8D for computation of disallowance:
The revenue contended that the provisions of section 14A can be triggered regardless of whether there is any exempt income or not, citing a Board Circular. On the other hand, the assessee relied on a Tribunal decision to argue that the amount of disallowance cannot exceed the exempt income. Additionally, for computing the average value of investments under Rule 8D, only investments yielding exempt income should be considered. The Tribunal examined these arguments to determine the correct interpretation of Rule 8D for the purpose of calculating the disallowance under section 14A.

3. Applicability of disallowance even in absence of exempt income:
The Tribunal referred to decisions by Special Benches to establish that the disallowance under section 14A cannot exceed the exempt income earned by the assessee. Citing precedents, the Tribunal emphasized that only investments yielding exempt income should be considered for computing the average value of investments to quantify the disallowance under section 14A. The Tribunal upheld the order of the CIT (A) which directed the Assessing Officer to restrict the disallowance to the extent of exempt income and consider only such investments for computation purposes.

In conclusion, the Tribunal dismissed the appeal filed by the revenue, affirming the principles established by Special Benches regarding the quantum of disallowance under section 14A and the correct interpretation of Rule 8D for computation purposes. The judgment clarified that the disallowance cannot exceed the exempt income earned and only investments yielding exempt income should be considered for calculating the disallowance amount.