2020 (8) TMI 259 - AT - Income Tax

Disallowance u/s 14A - disallowance u/s 14A is restricted by CIT- A i.e. to the extent of dividend income claimed as exempt - HELD THAT - No illegality or perversity in the findings returned by the ld. CIT (A) as it is settled principle of law that disallowance u/s 14A cannot exceed the exempt income earned by the assessee. Hon ble Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT held that, the disallowance more than exempt income earned by the assessee during the year under assessment cannot be made. Consequently, the appeal filed by the Revenue is hereby dismissed.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Calculation of disallowance under Rule 8D of the Income Tax Rules.
3. Restriction of disallowance by the Commissioner of Income Tax (Appeals).
4. Appeal before the Tribunal challenging the disallowance.

Analysis:
1. The case involved a dispute regarding the disallowance of ?2,21,57,375 made by the Assessing Officer (AO) under section 14A of the Income Tax Act, 1961. The AO computed the disallowance under Rule 8D of the Income Tax Rules based on the investment made by the assessee during the assessment year compared to the available funds. The appellant contested this disallowance, arguing that the Commissioner of Income Tax (Appeals) erred in law by deleting the addition without considering the AO's computation under section 14A.

2. The Commissioner of Income Tax (Appeals) restricted the disallowance to ?1,70,151, aligning with the exempt dividend income claimed by the assessee. The Commissioner referred to legal precedents, including the decision of the Hon'ble Delhi High Court and the ITAT, emphasizing that the disallowance under section 14A cannot exceed the exempt income earned by the assessee. The Commissioner's decision was based on the principle that the disallowance should not surpass the amount of exempt income, leading to the partial allowance of the appeal.

3. The Tribunal reviewed the facts and arguments presented by both parties. It acknowledged that the assessee had received exempt dividend income of ?1,70,151 and had voluntarily disallowed ?1,69,625 under section 14A. Considering the ownership of funds and investments, the Tribunal upheld the Commissioner's decision to restrict the disallowance to the extent of the exempt income. Citing the precedent set by the Hon'ble Delhi High Court, the Tribunal affirmed that the disallowance under section 14A cannot exceed the exempt income, thereby dismissing the Revenue's appeal.

In conclusion, the Tribunal upheld the Commissioner's decision to limit the disallowance under section 14A to the amount of exempt income earned by the assessee, emphasizing the legal principle that the disallowance cannot exceed the exempt income. The judgment serves as a reminder of the statutory provisions and judicial interpretations guiding the computation of disallowances under the Income Tax Act, ensuring a fair and consistent application of the law in such matters.