2019 (7) TMI 1859 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - assessee has debited interest expenses in the Profit Loss Account and also made large investment on which he earned tax free income which is not forming a part of the total income - HELD THAT - Since interest receipts are excess than the expenditure on interest there should not be any disallowance in Rule 14A of the Act in view of several judicial pronouncements including Safal Realty Pvt. Ltd. 2013 (11) TMI 1588 - ITAT AHMEDABAD - It is also settled principal that disallowance cannot exceed the total expenditure claimed by the assessee. The appellant had incurred and claimed total expenditure of ₹ 32,235/- (₹ 2235 30,000). In that view of the ratio laid down by the judicial pronouncements as discussed above, the CIT(A) correctly restricted disallowance of ₹ 32,235/- being the total expenditure claimed by the assessee deleting the remaining addition of ₹ 8,60,278/-. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.
2. Validity of the disallowance made by the Assessing Officer (AO) and its subsequent deletion by the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Calculation of disallowance in relation to exempt income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue concerns the disallowance made by the AO under Section 14A of the Income Tax Act, 1961, read with Rule 8D. The AO disallowed ?67,48,401/- on the grounds that the assessee had incurred interest expenses and made substantial investments that generated tax-free income. The AO's rationale was that expenses related to exempt income should not be deductible.

2. Validity of the Disallowance Made by the AO and its Subsequent Deletion by the CIT(A):
The CIT(A) deleted the disallowance made by the AO, which led to the Revenue's appeal. The CIT(A) found that the assessee had earned more interest income than the interest expenditure, resulting in a net positive interest income. The CIT(A) relied on various judicial precedents to conclude that if the interest income exceeds the interest expenditure, disallowance under Rule 8D is not justified.

3. Calculation of Disallowance in Relation to Exempt Income:
The assessee argued that the disallowance should not exceed the actual expenditure claimed. The assessee provided detailed calculations showing that the total expenditure incurred was ?32,235/-, and hence, disallowance should be limited to this amount. The CIT(A) accepted this argument, citing judicial precedents that support the principle that disallowance cannot exceed the total expenditure claimed by the assessee.

Judgment Summary:
The Tribunal upheld the order of the CIT(A), confirming that the disallowance under Section 14A read with Rule 8D cannot exceed the actual expenditure incurred by the assessee. The Tribunal noted that the assessee had earned a net positive interest income and had only claimed a total expenditure of ?32,235/-. Therefore, the disallowance was correctly restricted to ?32,235/-, and the remaining addition was rightly deleted by the CIT(A). The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal for both assessment years 2013-14 and 2014-15.

Conclusion:
The Revenue's appeal was dismissed, and the order of the CIT(A) was upheld, confirming that disallowance under Section 14A read with Rule 8D should be limited to the actual expenditure claimed by the assessee. The Tribunal emphasized that the AO must demonstrate satisfaction with the correctness of the assessee's claim before invoking Rule 8D and that disallowance cannot exceed the total expenditure incurred.