2020 (12) TMI 612 - HC - Income Tax

Disallowance u/s 14A r.w.r 8D - HELD THAT - In controversy involved in the present appeals filed by the Assessee is covered by a recent Division Bench judgment in M/S. MARG LIMITED VERSUS COMMISSIONER OF INCOME TAX CHENNAI 2020 (10) TMI 102 - MADRAS HIGH COURT wherein held that disallowance has far exceeded the exempted income in the form of dividends even though computed at the rate of 0.5% of the average investment made by the Assessee. In our opinion, the same is not permissible at all, because this average disallowance as computed under Rule 8D could be disallowed only if Assessee had actually earned Dividend income in excess of such amount of disallownace, that too after recording reasons for rejecting the apportionment of expenditure so incurred or claim that no such expenditure was incurred to earn that much of Dividend income was validly rejected by the Assessing Authority. We do not find any such reasons even recorded by the Assessing Authority in the present case. Thus issue is set aside and the appeals are restored on the file of the learned Tribunal to decide the appeals de novo afresh, in accordance with the law laid down by this Court in the judgment in M/s.Marg (cited supra).

Summary

Issues:
Challenging disallowance under Section 14A of the Income Tax Act for Assessment Years 2009-10, 2008-09, and 2010-11.

Analysis:
The Tax Case Appeals were filed by the Assessee against the order of the Income Tax Appellate Tribunal, 'D' Bench, Chennai, regarding disallowance under Section 14A of the Income Tax Act. The substantial questions of law raised included the confirmation of disallowance for strategic investments, absence of recording satisfaction for invoking Section 14A, failure to restrict disallowance to exempt income, and disregarding previous Tribunal orders. The controversy mirrored a recent Division Bench judgment involving similar issues. The Division Bench emphasized that the Assessing Authority must record satisfaction before resorting to Rule 8D computation for disallowance. The judgment clarified that the disallowance cannot exceed the exempted income, highlighting that expenditure to earn income should be reasonable and proportionate. The Tribunal's approach of allowing disallowance beyond the exempted income was deemed unsustainable and contrary to law.

The impugned order was set aside, and the appeals were restored to the Tribunal for fresh consideration based on the legal principles outlined in the Division Bench judgment. The Court refrained from directly answering the questions raised, leaving it to the Tribunal to decide the appeals in line with the legal position established. The Tax Case Appeals were disposed of without costs, and connected Civil Miscellaneous Petitions were closed. The judgment underscored the importance of adhering to the statutory provisions and ensuring that disallowances under Section 14A do not exceed the income exempted, maintaining the integrity of tax assessments and computations.