2022 (1) TMI 366 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D(2) - as pleaded that in proprietary concern, no investments were made by the assessee and that all the investments were made only in the personal activities of the assessee - HELD THAT - AO did not heed to the contentions of the assessee and directly proceeded to make disallowance by applying computation mechanism provided in 2nd and 3rd limb of Rule 8D(2) of the Rules and arrived at the disallowance and after reducing the voluntary disallowance made by the assessee, the net disallowance was made under section 14A of the Act in the assessment. This action of the AO was upheld by the ld. CIT(A). We find that the law is now very well by the decision of Hon ble Supreme Court in the case of Maxopp Investments 2018 (3) TMI 805 - SUPREME COURT wherein it has been held that disallowance under section 14A of the Act cannot exceed exempt income. There is no dispute that the exempt income derived by the assessee is only ₹ 8,64,141/-. The assessee before us is not seeking any reduction for disallowance of expenses made voluntarily in the sum of Rs, 14,57,932/- which itself is more than the exempt income. Hence, there is no need to make any further disallowance under section 14A of the Act. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues:
- Disallowance made under section 14A of the Income Tax Act read with Rule 8D(2) of the Income Tax Rules.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai centered around the disallowance made under section 14A of the Income Tax Act read with Rule 8D(2) of the Income Tax Rules. The assessee, an individual engaged in the business of builders and developers, had filed a return of income for the Assessment Year 2014-15. The main contention was whether the disallowance upheld by the Commissioner of Income Tax (Appeals) was justified. The assessee had earned exempt income of &8377; 8,64,141, against which voluntary disallowance of expenses amounting to &8377; 14,57,932 was made under Rule 8D(2) of the Rules.

The assessee argued that separate books of account were maintained for the proprietary concern and personal activities, with investments made only in personal activities and not in the proprietary concern. Therefore, the assessee contended that no further disallowance under section 14A of the Act should be made. However, the Assessing Officer proceeded to make a disallowance of &8377; 26,63,908, which was reduced to a net disallowance of &8377; 12,05,976 after accounting for the voluntary disallowance made by the assessee.

The Appellate Tribunal noted that the law, as established by the decision of the Hon’ble Supreme Court in the case of Maxopp Investments, stipulates that disallowance under section 14A of the Act cannot exceed the exempt income. Since the exempt income in this case was &8377; 8,64,141, and the voluntary disallowance made by the assessee was &8377; 14,57,932, which was higher than the exempt income, the Tribunal concluded that no further disallowance was necessary under section 14A of the Act. Consequently, the grounds raised by the assessee were allowed, and the appeal was allowed in favor of the assessee.

In conclusion, the Appellate Tribunal ITAT Mumbai ruled in favor of the assessee, emphasizing that no further disallowance under section 14A of the Income Tax Act was warranted, considering that the voluntary disallowance exceeded the exempt income, as per the provisions and judicial precedents cited during the proceedings.