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2020 (11) TMI 202 - AT - Income TaxDisallowance u/s 14A r.w.rule 8D - assessee made suo moto disallowance - HELD THAT - The Hon'ble Jurisdictional High Court in the case of Pragathi Krishna Gramin Bank Vs. JCIT 2018 (6) TMI 1283 - KARNATAKA HIGH COURT has held the disallowance under Section 14A of the Act cannot exceed the exempt income. In the instant case, the exempted income earned for the relevant assessment year admittedly is only a sum of ₹ 15,431. This is evident from copy of audited financial statement filed along with audit report in Form No.3CB. Going by the dictum laid down by the Hon'ble Jurisdictional High Court, the disallowance under Section 14A of the Act has to be restricted to ₹ 15,431, however since the assessee has suo moto in the Return of Income had disallowed a sum of ₹ 3,30,421 under Section 14A the disallowance is restricted to ₹ 3,30,421 as per the Return of Income filed by the assessee. - Appeal filed by the assessee is allowed.
Issues Involved:
1. Legality of the disallowance under Section 14A read with Rule 8D of the Income Tax Act. 2. Whether the disallowance under Section 14A can exceed the exempt income received. 3. Consideration of only those investments which have yielded exempt income for computing disallowance under Section 14A. Detailed Analysis: Legality of the Disallowance under Section 14A read with Rule 8D: The assessee challenged the Assessing Officer's (AO) decision to disallow ?13,31,421 under Section 14A read with Rule 8D, which included an additional disallowance of ?10,01,000 over the assessee's self-disallowed amount of ?3,30,421. The AO argued that the expression 'income' in Section 14A includes positive, nil, and negative income, and therefore, the corresponding expenditure should be excluded. The AO cited the Chennai ITAT's decision in M/s MGM Diamond Beach Resorts P. Ltd V DCIT, which held that even if no income is earned, the provision is applicable. The CIT (Appeals) upheld this view, noting that the assessee had received exempt dividend income of ?15,431 during the year. Whether the Disallowance under Section 14A can Exceed the Exempt Income Received: The assessee argued that the disallowance under Section 14A cannot exceed the exempt income received. The Tribunal referred to the Hon'ble Jurisdictional High Court's decision in Pragathi Krishna Gramin Bank Vs. JCIT, which held that disallowance under Section 14A cannot exceed the exempt income. The Tribunal also cited the Delhi High Court's judgment in PCIT Vs. Caraf Builders & Constructions (P) Ltd., affirmed by the Supreme Court, supporting the same principle. Consequently, the Tribunal ruled that the disallowance should be restricted to ?15,431, the exempt income earned, but since the assessee had already disallowed ?3,30,421 suo moto, the disallowance was limited to this amount. Consideration of Only Those Investments Which Have Yielded Exempt Income: The assessee contended that only investments yielding exempt income should be considered for disallowance computation under Section 14A. The AO, however, did not accept this argument, stating that the purpose of the investment is immaterial, as any expenditure incurred for earning tax-free income is not allowable. The CIT (Appeals) found that the assessee had received exempt dividend income of ?15,431, thus making the provisions of Section 14A applicable. Conclusion: The Tribunal allowed the appeal, ruling that the disallowance under Section 14A should not exceed the exempt income earned. However, since the assessee had already disallowed ?3,30,421 in its return, the disallowance was restricted to this amount. The Tribunal emphasized the need for a rational nexus between the disallowed expenditure and the exempt income earned, aligning with the principles established by higher judicial authorities.
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