2019 (4) TMI 1292 - AT - Income Tax

Disallowance u/s 14A cannot exceed the exempt income - CIT(A) restricted / upheld the disallowance u/s 14A r.w.r. 8D to the extent of exempt dividend income earned by the assessee - HELD THAT - In the case of Joint Investments (P) Ltd., Vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT has taken the view that the disallowance u/s 14A of the Act cannot exceed the exempt income. We hold that the disallowance u/s 14A of the Act in the case on hand should be restricted to the exempt dividend income earned by the assessee in the year under consideration. Consequently, the grounds raised by Revenue are dismissed.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Interpretation of provisions under Rule 8D(2)(ii) and Rule 8D(2)(iii).
3. Application of judicial pronouncements on disallowance exceeding exempt income.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:

The case involved an appeal by the Revenue against the order of the CIT(A)-4, Bengaluru, for Assessment Year 2013-14, where the assessee, a real estate development company, declared a loss in its income tax return. The assessment under section 143(3) resulted in a disallowance under section 14A of the Act. The CIT(A) partially allowed the appeal, restricting the disallowance to the extent of tax-free/exempt dividend income earned during the year. The Revenue challenged this decision, arguing that the disallowance should be as per Rule 8D(2)(ii) and Rule 8D(2)(iii) regardless of the exempt income earned.

Issue 2: Interpretation of provisions under Rule 8D(2)(ii) and Rule 8D(2)(iii):

The AO had disallowed a specific amount under section 14A r.w.r. 8D, comprising two components: &8377; 44,60,800 under Rule 8D(2)(ii) and &8377; 4,58,705 under Rule 8D(2)(iii). However, the CIT(A) restricted the disallowance to the extent of the exempt dividend income earned by the assessee, amounting to &8377; 3,08,226. The Tribunal referred to judicial pronouncements, including decisions by the Delhi High Court and other tribunals, which held that the disallowance under section 14A cannot exceed the exempt income earned. Following these precedents, the Tribunal upheld the CIT(A)'s decision to restrict the disallowance to the exempt dividend income.

Issue 3: Application of judicial pronouncements on disallowance exceeding exempt income:

The Tribunal relied on decisions by various courts and tribunals, such as the Delhi High Court and Mumbai Tribunal, which established that the disallowance under section 14A should not surpass the exempt income earned by the assessee. Citing these precedents, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to limit the disallowance to the exempt dividend income earned by the assessee. Consequently, both the Revenue's appeal and the assessee's Cross Objections were dismissed.

In conclusion, the Appellate Tribunal ITAT Bangalore, in its judgment for Assessment Year 2013-14, addressed the disallowance under section 14A of the Income Tax Act, 1961, emphasizing the restriction of disallowance to the extent of exempt income earned by the assessee as per Rule 8D(2)(ii) and Rule 8D(2)(iii) based on established judicial precedents.