2021 (1) TMI 581 - HC - Income Tax

Disallowance u/s 14A - whether disallowance u/s 14A could exceed the income not includable in the total income ? - HELD THAT - It is not disputed that the issue involved in this case is squarely covered by the decision of the Hon'ble Division Bench of this Court in the case of Marg Ltd. 2020 (10) TMI 102 - MADRAS HIGH COURT as relying on M/S. TIDEL PARK LIMITED 2020 (7) TMI 339 - MADRAS HIGH COURT held that the mandate of s.14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.' The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income 'includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith. The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income.- Decided in favour of assessee.

Summary

Issues:
1. Challenge to order under Section 260A of the Income Tax Act, 1961 for assessment year 2010-11.
2. Disallowance under Section 14A of the Income Tax Act.
3. Interpretation of provisions related to disallowance under Section 14A.

Analysis:
1. The appeal was filed by the Revenue challenging the order made by the Income Tax Appellate Tribunal for the assessment year 2010-11 under Section 260A of the Income Tax Act, 1961. The substantial questions of law raised by the assessee pertained to the correctness of upholding the disallowance made under Section 14A of the Income Tax Act and whether such disallowance could exceed the income not includable in the total income.

2. The High Court noted that the issue in this case was covered by a previous decision where it was held that the Assessing Officer cannot make excessive disallowance beyond the dividend income declared by the Assessee. The Court referred to various judgments, including those of the Delhi High Court and the Bombay High Court, to support the view that disallowance under Section 14A cannot exceed the extent of exempted income itself.

3. The Court further delved into the interpretation of Section 14A and Rule 8D, emphasizing that the provision was inserted to prevent the claiming of expenses incurred in relation to exempt income against taxable income without apportionment. It was clarified that the provision is related to the earning of actual income and not notional or anticipated income. The Court rejected the notion that disallowance could be made on exempt income 'includable' in total income, stating that it would entail the assessment of notional income, which is not permissible under the law.

4. The Court highlighted that the computation of disallowance under Rule 8D involves direct and indirect attribution, and accepting the Revenue's submission would lead to an artificial computation on notional and assumed income, which was deemed inappropriate. Ultimately, the Court allowed the appeal filed by the assessee, setting aside the Tribunal's order and answering the substantial questions of law in favor of the assessee.

In conclusion, the High Court's judgment provided a detailed analysis of the issues raised, emphasizing the limitations on disallowance under Section 14A and interpreting the provisions in light of previous judicial decisions and the legislative intent behind Section 14A of the Income Tax Act, 1961.