2020 (6) TMI 780 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - non-recording of dissatisfaction - Assessee submitted that it did not incur any expense during the year for earning exempt income - HELD THAT - As rightly pointed out that the Ld CIT(A), we notice that the AO has issued show cause notice to the assessee on due examination of financial statements of the assessee, since the assessee did not make any disallowance u/s 14A of the Act, even though it had earned exempt income. Hence the dissatisfaction of the AO has been demonstrated in the assessment order and it is not a case of mechanical invoking of provisions of Rule 8D. Accordingly we reject ground of the assessee. Assessee has got sufficient own funds and hence disallowance u/s 14A is not warranted - As noticed earlier that the exempt income earned by the assessee included share income from partnership firm , which is exempt u/s 10(2A) of the Act. Hence, we are of the view that the investments made in partnership firm are also required to be considered for comparing the value of investments with the available own funds. We notice that the value of investments held by the assessee as at the year end is ₹ 1,444.46 crores, whereas the own funds available with the assessee was ₹ 585.21 crores only. Hence, it cannot be said that the own funds available with the assessee was more than the value of investments. Hence, this argument of the assessee also fails on the above said facts. Share income from partnership firm should not be considered as exempt income, since the profits of partnership firm have already suffered tax in the hands of the partnership firm - We notice that the very same issue was considered by Ahmedabad Special bench of ITAT in the case of Shri Vishnu Anand Mahajan 2012 (6) TMI 297 - ITAT, AHMEDABAD and identical contentions made by the assessee were rejected by holding that, once the share income is excluded from the total income u/s 10(2A) of the Act, the provisions of section 14A of the Act would apply to it. Hence, this contention of the assessee would fail. Assessee is a partner in many firms - We do not find any merit in this contention of the assessee, since what is exempted under the Act is share income received from the partnership firm u/s 10(2A) of the Act, meaning thereby, the profit or loss received from the partnership firm does not enter into computation of income at all. Hence the question of setting off income from partnership firm inter se does not arise. Accordingly, once a particular income does not enter into the computation on the ground the same is exempt, as held by special bench in the case of Sri Vishnu Anand Mahajan (supra), provisions of section 14A of the Act would apply. In this case, there is no dispute that the share income from partnership firm to the tune of ₹ 1,02,01,474/- has been claimed as exempt u/s 10(2A) of the Act. Hence the provisions of sec.14A shall apply to the above said exempt income. Disallowance made by the tax authorities u/s 14A of the Act is much more than exempt income - As quantum of disallowance u/s 14A of the Act should not exceed the amount of exempt income, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/a 14A to the amount of exempt income.

Summary

Issues involved:
Appeal against disallowance made under section 14A of the Income Tax Act for assessment year 2014-15.

Analysis:
1. The assessee, a real estate developer, received exempt income during the year. The Assessing Officer (AO) computed a substantial disallowance under section 14A based on Rule 8D of Income Tax Rules, which the assessee disputed.

2. The AO disallowed a significant amount under section 14A, comprising interest and administrative expenses. The assessee contended before the Commissioner of Income Tax Appeals (CIT(A)) that the AO did not record dissatisfaction before invoking Rule 8D, and argued for a restriction on disallowance to the amount of exempt income.

3. The CIT(A) upheld the disallowance, citing a CBDT circular mandating disallowance under section 14A even if no exempt income was earned. The CIT(A) rejected the assessee's arguments, leading to the appeal before the Income Tax Appellate Tribunal (ITAT).

4. The ITAT found that the AO had demonstrated dissatisfaction by issuing a show cause notice to the assessee. The tribunal rejected the assessee's claim of having sufficient own funds to warrant no disallowance under section 14A, considering all investments, including those in partnership firms.

5. The ITAT addressed the contention that disallowance under section 14A should not exceed the exempt income. Citing judicial precedents, including decisions by the Delhi High Court and Mumbai Tribunal, the ITAT directed the AO to restrict the disallowance under section 14A to the amount of exempt income earned by the assessee.

6. Consequently, the ITAT partly allowed the assessee's appeal, directing the AO to limit the disallowance under section 14A to the extent of the exempt income. The stay petition was dismissed as the appeal was disposed of.

This detailed analysis of the judgment provides a comprehensive overview of the issues involved, the arguments presented by the parties, and the final decision rendered by the ITAT, ensuring a thorough understanding of the legal proceedings and outcomes.