2018 (6) TMI 1469 - HC - Income Tax

Disallowance in terms of Section 14A of the Act r/w 8D - Held that - disallowance under Section 14A cannot be a wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the Act but an enabling provision for assessing authority to compute the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty in not permissible in law. Since no such exercise has been undertaken by the assessing authority, the case calls for a remand. See Commissioner of Income Tax & Anr. Vs. Microlabs Ltd., 2016 (4) TMI 219 - KARNATAKA HIGH COURT .

Summary

Issues:
1. Disallowance of expenditure for earning tax-exempt income by way of Dividends under Section 14A of the Income Tax Act, 1961.

Analysis:
The Revenue filed an appeal under Section 260A of the Income Tax Act challenging the order passed by the ITAT, Bangalore Bench 'A', regarding the disallowance of expenses incurred by the assessee for earning tax-exempt income through Dividends. The dispute centered on whether the disallowance under Section 14A of the Act read with Rule 8D could exceed the expenditure computed by the assessee. The Assessing Authority disallowed a substantial amount, but the Tribunal upheld the order of the Commissioner of Income Tax (Appeals), limiting the disallowance to a proportionate amount of interest expenditure incurred by the assessee under Rule 8D(2)(ii) of the IT Rules.

The Division Bench of the Karnataka High Court had previously ruled in favor of the assessee in two separate cases, emphasizing that the disallowance under Rule 8D of the Rules should not surpass the expenditure directly related to earning the tax-exempt income. The Court cited precedents from the Bombay High Court to support its decision. In another case, the Court reiterated that the assessing authority must establish a rational nexus between the expenditure incurred and the income earned to justify any disallowance under Section 14A. The Court emphasized that the disallowance under Section 8D cannot exceed the expenses claimed by the assessee under the Proviso to Rule 8D.

Based on the established legal principles and precedents, the High Court concluded that no substantial questions of law arose in the present appeal, and therefore confirmed the Tribunal's order. The appeal by the Revenue was dismissed, and no costs were awarded.

This detailed analysis of the judgment highlights the key issues surrounding the disallowance of expenditure for earning tax-exempt income through Dividends under Section 14A of the Income Tax Act, providing a comprehensive understanding of the legal reasoning and precedents considered by the Court in reaching its decision.