2018 (1) TMI 1724 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - CIT(A) confirmed addition as assessee had not been able to demonstrate to have invested in the above tax free investments from its interest free funds only - HELD THAT - AR states very fairly that the impugned disallowance ought not to have exceeded the entire exempt income amount as per judgment Joint Investments Pvt. Ltd. vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT Revenue on the other hand strongly supports both the lower authorities action invoking the impugned disallowance, but however fails to rebut the above legal proposition as per hon ble Delhi high court s recent decision. We therefore partly accept assessee s grievance to restrict the impugned disallowance to the extent of exempt income figure - assessee submits that the instant concession of challenging the quantum of impugned disallowance instead of its correctness on merits be not taken as precedent in any preceding or succeeding assessment year. We accept the same to make it clear that our instant order shall not be treated as a precedent against the assessee. Assessee s appeal is partly allowed.

Summary

Issues:
1. Disallowance under Section 14A r.w. Rule 8D (2)(ii) and clause (iii) of the Income Tax Act, 1961.
2. Application of legal precedents in determining the extent of disallowance.

Issue 1: Disallowance under Section 14A r.w. Rule 8D (2)(ii) and clause (iii) of the Income Tax Act, 1961:

The appeal pertains to the assessment year 2012-13, challenging the Assessing Officer's disallowance under Section 14A r.w. Rule 8D (2)(ii) and clause (iii) of the Income Tax Act, 1961. The disallowance was based on the assessee earning exempt income of Rs. 83,613 in the relevant year. The CIT(A) upheld the Assessing Officer's action, citing the lack of evidence that the tax-free investments were made from interest-free funds. The assessee contended that the disallowance should not exceed the exempt income amount, referring to a Delhi High Court judgment (2015) 372 ITR 694. The ITAT partially accepted the assessee's grievance, restricting the disallowance to the extent of the exempt income figure, i.e., Rs. 83,613. The ITAT clarified that this decision should not set a precedent for future assessments.

Issue 2: Application of legal precedents in determining the extent of disallowance:

The ITAT considered the legal proposition from the Delhi High Court's judgment in Joint Investments Pvt. Ltd. vs. CIT, emphasizing that the disallowance should not exceed the exempt income amount. The Authorized Representative for the assessee highlighted this legal position, which was not effectively rebutted by the Revenue's representative. Consequently, the ITAT partly allowed the assessee's appeal by limiting the disallowance to the exempt income figure. The ITAT specifically noted that this decision should not be construed as a precedent against the assessee in future assessments.

In conclusion, the ITAT, comprising Shri S. S. Godara, Judicial Member, and Shri Amarjit Singh, Accountant Member, partially allowed the assessee's appeal, restricting the disallowance under Section 14A r.w. Rule 8D (2)(ii) and clause (iii) to the extent of the exempt income earned during the relevant assessment year. The judgment underscored the importance of aligning disallowance amounts with exempt income figures, as per established legal precedents.