2022 (3) TMI 1120 - AT - Income Tax

Addition u/s 14A - As argued that the disallowance under Rule 8D for the purpose of Section 14A should not exceed the dividend income - HELD THAT - In the present case, we find that the assessee earned only ₹ 100/- as dividend income and the AO made disallowance of ₹ 3,16,488/- which is evidentay exceeds the dividend income. Therefore, the order of CIT(A) is not justified in confirming the disallowance made by the AO exceeding the dividend income. In the light of the decision of Hon ble High Court of Bombay in the case of M/s. Nirved Traders Pvt. Ltd. 2019 (4) TMI 1738 - BOMBAY HIGH COURT we deem it proper to hold the disallowance as confirmed by the CIT(A) is not maintainable and it is not justified. Therefore, we direct the AO to restrict the disallowance for the purpose of Section 14A of the Act to the dividend income earned and the said disallowance shall not exceed the dividend income. Thus, the grounds raised by the assessee are allowed.

Summary

Issues:
1. Justification of confirming addition made by AO u/s. 14A r.w. Rule 8D(2)(iii) by CIT(A).

Analysis:
The appeal before the Appellate Tribunal ITAT Pune involved a single issue regarding the justification of confirming the addition made by the Assessing Officer (AO) under section 14A read with Rule 8D(2)(iii) by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a company engaged in bio energy and solar technologies projects, contested the addition made by the AO amounting to ?3,16,488/- under Rule 8D(2)(iii) concerning dividend income of ?100/-. The Appellate Tribunal considered the arguments presented by both parties and examined the facts and circumstances of the case.

The AO disallowed expenses under Rule 8D(2)(iii) based on the average investment of ?6,32,97,660/-, which was 0.5% of the total investment. The CIT(A) upheld the AO's decision, emphasizing the need for management to maximize returns on investments and monitor performance effectively. However, the Appellate Tribunal referenced the decision of the Hon’ble High Court of Bombay in the case of M/s. Nirved Traders Pvt. Ltd., which limited the disallowance under section 14A to the amount of dividend income earned. The Tribunal noted that the disallowance made by the AO exceeded the dividend income of ?100/-, making the CIT(A)'s confirmation of the disallowance unjustified.

Citing precedents from various High Courts, the Appellate Tribunal directed the AO to restrict the disallowance under section 14A to the dividend income earned by the assessee, ensuring that the disallowance does not surpass the dividend income. Ultimately, the Tribunal allowed the grounds raised by the assessee and ruled in favor of restricting the disallowance to the dividend income, in accordance with legal precedents and the specific circumstances of the case.