2018 (3) TMI 1399 - AT - Income Tax

Addition u/s 14A - Held that - Disallowance under section 14A cannot exceed the total actual expenditure incurred and claimed by the assessee. The appellant case the appeal is allowed and the excess additions made in terms of Rule 8D for an amount of ₹ 6,47,21,925/- is directed to be deleted. As a logical corollary this addition would also be required to be deleted in computing book profit under section 115JB of the IT Act - Decided against revenue

Summary

Issues Involved:
Disallowance of expenses under Section 14A of the Income Tax Act, 1961.

Detailed Analysis:

1. Background:
The appellant, Revenue, challenged the order of CIT(A)-V, New Delhi, regarding the disallowance of expenses amounting to ?6,47,21,925 under Section 14A of the Income Tax Act, 1961.

2. Contentions of the Parties:
The Revenue contended that expenses related to earning exempt income should be considered for disallowance as per Rule 8D of the IT Rules 1962, irrespective of whether any exempt income was earned by the assessee during the year or not. The assessee argued that the expenses in question were not related to earning exempt income and, therefore, should not be subjected to disallowance under Section 14A.

3. Assessment and Appeal:
The Assessing Officer completed the assessment at an income of ?7,74,95,320 and book profit at ?8,22,16,670, differing from the returned income of ?1,27,73,395. The CIT(A) allowed the appeal of the assessee, leading to the Revenue filing an appeal before the ITAT.

4. ITAT's Decision:
After hearing both parties and examining the facts, the ITAT upheld the CIT(A)'s decision. The ITAT noted that the expenses in question were not related to earning exempt income, citing precedents such as Maxopp Investment Ltd vs CIT and Bengal & Assam Co. Ltd. The ITAT emphasized that the disallowance under Section 14A cannot exceed the total actual expenditure claimed by the assessee.

5. Judgment and Conclusion:
The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s order. The ITAT's decision was based on the principle that expenses not related to earning exempt income should not be subject to disallowance under Section 14A. The ITAT directed the deletion of the excess additions made under Rule 8D, amounting to ?6,47,21,925, and also required the same to be deleted in computing book profit under section 115JB of the IT Act.

In conclusion, the ITAT's judgment emphasized the importance of establishing a direct link between expenses and the earning of exempt income before disallowance under Section 14A can be justified. The decision highlighted the need for assessing officers to record satisfaction regarding the correctness of the assessee's claims before applying Rule 8D for disallowance calculations.