2021 (11) TMI 740 - AT - Income Tax

Disallowance u/s 14A r.w.Rule 8D - Amount assessee had earned a dividend income - HELD THAT - Hon ble Delhi High Court in the case of Joint Investment P.Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT held that by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A and is only to the extent of disallowing expenditure; incurred by the assessee in relation to the tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. Respectfully following the ratio laid down by the Hon ble Delhi High Court we direct the Assessing Officer to restrict the disallowance to the extent of exempt income on dividend income earned by assessee as u/s 14A r.w.Rule 8D of Rules. Thus grounds raised by the assessee in this appeal are partly allowed.

Summary

Issues:
Disallowance under section 14A read with rule 8D of the Income Tax Act, 1961.

Analysis:
The appeal pertains to the assessment year 2014-15 and challenges the disallowance made under section 14A of the Income Tax Act, 1961, amounting to ?3,07,307. The Assessing Officer also made ad hoc disallowances for certain expenses. The assessee appealed to the Ld.CIT(A), who partially allowed the appeal by deleting one portion of the disallowance but confirming the disallowance under section 14A. The assessee then appealed to the Tribunal.

The main contention of the assessee was that the disallowance made exceeded the exempt income earned during the year, which was ?49,489. Citing the judgment of Joint Investment P.Ltd. vs CIT, the assessee argued that disallowance cannot exceed the exempt income. The Ld. Sr. DR supported the lower authorities' orders.

The Tribunal, after considering the arguments, noted that the assessee had indeed earned only ?49,489 as dividend income during the relevant year. Referring to the judgment of Joint Investment P.Ltd. vs CIT, the Tribunal held that disallowance under section 14A should be limited to the extent of exempt income. Therefore, the Tribunal directed the Assessing Officer to restrict the disallowance to ?49,489 under section 14A read with Rule 8D of the Rules. Consequently, the grounds raised by the assessee were partly allowed, and the appeal was partly allowed.

The decision was pronounced at the conclusion of a virtual hearing on 03.09.2021 in the presence of both parties.