2021 (3) TMI 931 - AT - Income Tax

Disallowance under section 14A - whether the disallowance under section 14A can exceed the exempt income? - Suo moto disallowance made by assessee - HELD THAT - Assessee, during the impugned assessment year, has indeed earned dividend income to the extent of ₹ 8,550. We find that now it is a well settled principles of law that the disallowance computed under section 14A of the Act r/w rule 8D of the Rules shall not exceed the exempt income earned by the assessee. This principle of law is in conformity with the decision of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT wherein it has been held that disallowance of expenditure under section 14A of the Act shall not exceed exempt income earned for the year under consideration. However, in the given case, the assessee has disallowed suo-motu by following the provisions of Rule 8D(2)((iii) i.e., 0.5% on average investment. It is settled law that the administrative expenses of 0.5% under Rule-8D(2)(iii) should be on the investment which earned the exempt income. We direct the AO to calculate the disallowance under rule 8D(2)(iii) as per the above direction and restrict the disallowance to the above amount or exempt income whichever is less. Accordingly, we set aside the impugned order of the learned Commissioner (Appeals) and direct the Assessing Officer to restrict the disallowance computed under section 14A r/w Rule 8D of Rules, as per the above direction. Consequently, the grounds of appeal raised by the assessee are allowed.

Summary

Issues:
1. Whether the disallowance under section 14A of the Income Tax Act, 1961 can exceed the exempt income.

Analysis:

Issue 1:
The appeal was filed by the assessee challenging the order passed by the Commissioner (Appeals) for the assessment year 2015-16. The primary issue under consideration was whether the disallowance under section 14A of the Income Tax Act could exceed the exempt income earned by the assessee during the relevant year. The assessee had voluntarily disallowed an amount under section 14A at the time of filing the return of income. The Assessing Officer accepted the declared income, including the voluntary disallowance. The Commissioner (Appeals) restored the disallowance made by the assessee, which was challenged by the assessee before the Tribunal.

The Commissioner (Appeals) upheld the disallowance made by the assessee under section 14A, emphasizing that the assessee had voluntarily decided on the amount to be disallowed towards earning exempt income. However, the Tribunal ruled that the disallowance under section 14A should not exceed the exempt income earned by the assessee during the year, citing the decision of the Hon'ble Delhi High Court in Cheminvest Ltd. v/s. CIT. The Tribunal directed the Assessing Officer to calculate the disallowance under Rule 8D(2)(iii) based on the investment that earned the exempt income and restrict the disallowance to the exempt income or the calculated amount, whichever is lower. Consequently, the Tribunal allowed the appeal raised by the assessee, setting aside the order of the Commissioner (Appeals) and directing the Assessing Officer to restrict the disallowance under section 14A accordingly.

In conclusion, the Tribunal's decision clarified that the disallowance under section 14A of the Income Tax Act should not exceed the exempt income earned by the assessee, and directed the Assessing Officer to calculate the disallowance based on the investment that generated the exempt income, in line with the principles established by the Hon'ble Delhi High Court.