2021 (2) TMI 584 - AT - Income Tax

Disallowance u/s 14A - AO has worked the disallowance under section 14A which included interest expenses required to be allocated under section 14A read with Rule 8D - HELD THAT - Issue in dispute is squarely covered by the decision of Hon ble jurisdictional high Court in the case of CIT Vs. Corrtech Energy Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT wherein it was held that maximum disallowance under section 14A could be made equivalent to exempt income earned by the assessee in the absence of any expenses being incurred to earn such income. Therefore, in the present case, disallowance cannot exceed the dividend income earned by the assessee. Considering this proposition, the ld.CIT(A) has already restricted the disallowance to ₹ 4,87,675/-, hence, no interference is called for on this issue. This ground of revenue dismissed.

Summary

Issues:
Disallowance under section 14A of the Income Tax Act, 1961.

Analysis:
The case involved an appeal by the Revenue against the order of the ld.CIT(A)-2, Ahmedabad regarding the disallowance under section 14A of the Income Tax Act, 1961 for the Asstt.Year 2015-16. The assessee, a non-banking finance company, had declared dividend income claimed as exempt under section 10(35) without disallowing any expenses. The AO observed that the investment in shares, from which exempt income was claimed, was made from interest-bearing borrowed funds. The assessee argued that it had sufficient interest-free funds for investment and explained the fund flow. However, the AO found the explanation unsatisfactory and made a disallowance of ?90,55,252 under Section 14A r.w. rule 8D.

The assessee appealed to the ld.CIT(A), who allowed the claim based on a previous appellate order for the Asst.Year 2014-15, restricting the disallowance to the exempt income earned by the assessee, i.e., ?4,87,675. The Revenue, aggrieved by this decision, approached the Tribunal.

The Tribunal noted that the ld.CIT(A) had restricted the disallowance to the amount of dividend income earned by the assessee, in line with the decision of the Hon’ble jurisdictional high Court in CIT Vs. Corrtech Energy Ltd. The Tribunal upheld the ld.CIT(A)’s decision, stating that the disallowance cannot exceed the exempt income earned by the assessee. Therefore, the appeal of the Revenue was dismissed, and the order was pronounced on 12th February 2021 at Ahmedabad.

In conclusion, the Tribunal upheld the decision of the ld.CIT(A) to restrict the disallowance under section 14A to the amount of dividend income earned by the assessee, in accordance with relevant legal precedents, resulting in the dismissal of the Revenue’s appeal.