2015 (11) TMI 1875 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - Expenditure incurred on earning exempt - HELD THAT - In the instant case, the income from dividend has been shown at Rs. 9,23,660/-, disallowance u/s 14 A read with Rule 8 D worked out by the AO comes to Rs. 24,53,928/-. Thus it is clear that the AO has disallowed the entire tax exempt income which is not permissible in view of the judgment of JOINT INVESTMENTS PVT LTD VERSUS COMMISSIONER OF INCOME TAX 2015 (3) TMI 155 - DELHI HIGH COURT . The Hon ble Delhi High Court held that the window for disallowance is indicated in section14 A, and is only to the extent of disallowing expenditure incurred by he assessee in relation to the tax exempt income . The disallowance under section 14 A read with Rule 8 D as worked out by the AO is not in accordance with law and as such working is not sustainable. In view of the above we uphold the order of the Ld. CIT(A) restricting the disallowance u/s 14A to Rs. 9,23,660/-.

Summary

Issues:
1. Disallowance of expenses incurred for earning exempt income under section 14A read with Rule 8D.
2. Appeal against the order of CIT(A) restricting the disallowance.
3. Dispute over the disallowance amount by the Assessing Officer.
4. Interpretation of section 14A and Rule 8D regarding the disallowance of expenses.
5. Application of judgments by ITAT Chandigarh Bench and Delhi High Court in similar cases.
6. Assessment of disallowance in relation to the tax-exempt income.

Analysis:
The case involved an appeal by the Revenue and Cross Objection by the Assessee against the order of CIT(A) regarding the disallowance of expenses incurred for earning exempt income under section 14A read with Rule 8D. The Assessing Officer had disallowed expenses amounting to Rs. 24,53,928/-, which was reduced to Rs. 9,23,660/- by CIT(A). The Revenue challenged this reduction, arguing that some interest expenditure should be attributable to the investments made. The Assessee contended that the disallowance should not exceed the exempt income earned. The Tribunal noted that investments were old, no new investments were made, and the interest expenses were high compared to the exempt income.

The Tribunal explained the provisions of section 14A and Rule 8D, emphasizing the categorization of direct and indirect expenses for earning exempt income. It highlighted that the disallowance was made under Rule 8D(ii) for interest expenses not directly identifiable with exempt income. The Tribunal agreed with CIT(A) that the entire interest expenditure could not be related to exempt investments due to surplus funds with the Assessee. It upheld the restriction of disallowance to the extent of exempt income earned, citing precedents from ITAT Chandigarh Bench and Delhi High Court.

Referring to the Delhi High Court judgment, the Tribunal emphasized that the disallowance under section 14A should not exceed the expenditure incurred in relation to tax-exempt income. It noted that the Assessing Officer's disallowance of the entire tax-exempt income was not permissible. Consequently, the Tribunal upheld the order of CIT(A) restricting the disallowance to Rs. 9,23,660/- and dismissed the Revenue's appeal against the deletion of the disallowance. The Tribunal concluded by dismissing both the appeal by the Revenue and the Cross Objection of the Assessee.

In summary, the Tribunal clarified the application of section 14A and Rule 8D in determining the disallowance of expenses for earning exempt income, emphasizing that the disallowance should not exceed the exempt income earned. It relied on precedents to support its decision and highlighted the importance of examining the accounts before making disallowances.