2021 (7) TMI 516 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - Substantial questions of law involved in this appeal have been answered in favour of the assessee by this Court in M/S. QUEST GLOBAL ENGINEERING SERVICES PVT. LTD. 2021 (3) TMI 434 - KARNATAKA HIGH COURT as held only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD 2018 (3) TMI 805 - SUPREME COURT is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is 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 exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Interpretation of Rule 8D(2)(ii) and 8D(iii) in relation to exempted income.
3. Applicability of Board's circular No.5/2014 dated 11.02.2014.

Analysis:
1. The appeal was filed by the revenue against the order of the Income Tax Appellate Tribunal regarding the disallowance under Section 14A of the Income Tax Act for the assessment year 2010-2011. The assessee, a Private Limited Company engaged in real estate and construction activities, declared an income of ?8,07,523. The Assessing Officer made a disallowance of ?3,22,48,476 under Section 14A of the Act in the assessment order dated 12.03.2012.

2. The Commissioner of Income Tax (Appeals) partly allowed the appeal by deleting a portion of the disallowance under Section 14A read with Rule 8D(ii) and upheld a portion of the disallowance. Both the assessee and the revenue filed appeals against this order before the Tribunal.

3. The Tribunal, in its order dated 12.09.2014, allowed the appeal of the assessee and dismissed the appeal of the revenue. The substantial questions of law raised in the appeal were whether the Tribunal was correct in deleting the disallowance under Section 14A r.w. Rule 8D(2)(ii) and 8D(iii) in relation to investments yielding tax-free income and whether the Tribunal correctly considered the Board's circular No.5/2014 dated 11.02.2014.

4. The learned senior counsel for the respondent pointed out that similar substantial questions of law had been decided in favor of the assessee in a previous judgment of the Court dated 15.02.2021 in a different case. The counsel for the revenue did not dispute this submission. Consequently, based on the reasoning and decision in the previous judgment, the substantial questions of law in this appeal were answered in favor of the assessee, leading to the dismissal of the appeal.

In conclusion, the High Court upheld the decision of the Tribunal in favor of the assessee, emphasizing the interpretation of Section 14A, Rule 8D(2)(ii) and 8D(iii) in relation to exempted income and considering the applicability of the Board's circular in such cases.