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2020 (5) TMI 625 - AT - Income TaxDisallowance u/s 14A r.w rule 8D(2)(iii) - disallowance suo motto by assessee - HELD THAT - If something has been offered by an assessee patently under some misconstruction of law, then the revenue cannot be permitted to plead that since the assessee has offered as its income, therefore, it has to be taxed. Therefore which is based on large number of decisions including that of Hon ble jurisdictional High Court in the case of S.R. Koshti 2004 (12) TMI 62 - GUJARAT HIGH COURT allow the additional ground of appeal as well as original ground raised by the assessee. In other words, since there is no tax free income, there could not be any disallowance under section 14A - direct the AO to re-compute the income of the assessee after excluding the suo motto amount disallowed by the assessee. Apart from the above disallowance made by the AO on account of administrative expenses is concerned, this also stands deleted. Both amounts be excluded from the computation of income, and thereafter income of the assessee be duly determined. - Appeal of the assessee is allowed.
Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961. 2. Applicability of disallowance when no exempt income is earned. 3. Legitimacy of the CIT(A) granting relief beyond the return of income. Detailed Analysis: Disallowance under Section 14A: The assessee challenged the disallowance of ?2,97,347/- made by the AO under section 14A of the Income Tax Act, 1961, read with rule 8D(2)(iii) of the Income Tax Rules. The AO observed that the assessee did not calculate the disallowance using the prescribed formula and instead disallowed a sum of ?6,275/- under administrative expenses. The AO applied the formula and worked out a disallowance of ?2,97,347/-, which was confirmed by the CIT(A). Applicability of Disallowance When No Exempt Income is Earned: The assessee argued that since there was no tax-free income, no expenditure was required to be disallowed under section 14A. This argument was supported by the decision of the Hon'ble Gujarat High Court in the case of Corrtech Energy P. Ltd. The Tribunal noted that various courts, including the Hon'ble Delhi High Court and the Hon'ble Madras High Court, have held that disallowance under section 14A cannot be made when no exempt income is earned. The Tribunal referenced decisions where it was ruled that section 14A can only be triggered if the assessee seeks to offset expenditure against income that does not form part of the total income under the Act. Legitimacy of CIT(A) Granting Relief Beyond the Return of Income: The Tribunal considered whether the CIT(A) was justified in granting relief on disallowance that the assessee had suo moto made in its return of income. It was argued that the CIT(A) could remove the disallowance even if the assessee did not file a revised return. The Tribunal endorsed the CIT(A)'s view that a mistake or inadvertence by the assessee, leading to over-assessment, does not estop the assessee from claiming relief. The Tribunal cited several judgments, including CIT vs. Shelly Products and S. R. Koshti vs. CIT, which emphasized that tax authorities must ensure only legitimate tax dues are collected. The Tribunal concluded that the CIT(A)'s action in granting relief under section 14A, despite the assessee's initial disallowance, was justified. The Tribunal noted that the decision of Corrtech Energy P. Ltd. clarified the law that no disallowance under section 14A is warranted if no exempt income is earned, and this should have been considered by the AO and CIT(A) during the assessment. Conclusion: The Tribunal allowed the appeal, directing the AO to recompute the income of the assessee by excluding the suo moto disallowed amount of ?59,55,723/- and the disallowance of ?2,97,347/- made by the AO. The Tribunal emphasized that the revenue authorities must guide the assessee in computing true income and cannot enforce incorrect admissions by the assessee. Pronouncement: The appeal of the assessee was allowed, and the judgment was pronounced in the Open Court on 27th May 2020.
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