2019 (2) TMI 1066 - AT - Income Tax

Disallowance u/s 14A - Held that - The assessee did not claim any expenses to earn the exempt income and the income of the assessee is based upon the principle of mutuality. CIT(A) has wrongly confirmed the additions raised by the AO in view of the Section 14A read with Rule 8D of the Act, therefore, we delete the addition raised in view of the provision of section 14A read with Rule 8D of the Act and allowed the claim of the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Challenge to addition under section 14A of Income Tax Act 1961.
2. Applicability of section 14A in case of exempt income under principle of mutuality.
3. Claiming expenses disallowable u/s. 14A against taxable income.

Analysis:

Issue 1:
The assessee contested the addition of ?2,51,638 under section 14A of the Income Tax Act 1961. The Assessing Officer applied Section 14A r.w. Rule 8D to assess the expenditure incurred to earn exempt income. The CIT(A) confirmed this addition. The assessee argued that since expenses were not claimed against the exempt income, section 14A should not apply. The department disagreed, supporting the CIT(A)'s decision. The assessee claimed income under the principle of mutuality, distinguishing between income related to mutual activities and taxable income. The assessee did not claim any expenses against taxable income. The Tribunal noted the rationale for inserting section 14A in the Act to prevent reducing tax payable on non-exempt income by debiting expenses against taxable income. Considering these factors, the Tribunal held that the CIT(A) erred in confirming the addition under section 14A and deleted the ?2,51,638 addition.

Issue 2:
The assessee argued that section 14A should not apply as the income was exempt under the principle of mutuality. The Tribunal agreed with the assessee's position, emphasizing that no expenses were claimed against the exempt income. The Tribunal highlighted the importance of only allowing expenses related to earning taxable income. Consequently, the Tribunal ruled in favor of the assessee, allowing the claim and deleting the addition.

Issue 3:
The assessee contended that expenses disallowable under section 14A should not be claimed against taxable income. The Tribunal's decision in favor of the assessee on the first issue indirectly addressed this concern, as the addition under section 14A was deleted. Therefore, the Tribunal did not explicitly address this specific argument in its judgment.

In conclusion, the Tribunal allowed the assessee's appeal, deleting the addition under section 14A of the Income Tax Act 1961. The decision was based on the principle of mutuality and the non-claiming of expenses against exempt income, in line with the provisions of the Act and relevant rules.