2023 (4) TMI 734 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(iii) - As submitted that assessee had not earned any income which is exempt and not includible in the total income of the assessee for the year - HELD THAT - Admittedly, it is a fact on record that assessee had reported long-term capital gains as taxable income in the return form, taxable at the rate of 20% which was set off against the business loss of the current year. It is also a fact as noted from the return form, that assessee had not earned any income, exempt from tax and not includible in the total income for the year. AO has computed the disallowance under section 14A of the Act read with rule 8D(iii) on a misconceived fact that assessee has earned long-term capital gains which is exempt under the Act. We find that on this misconceived fact of assessee having earned exempt income, disallowance made by the Ld. AO under section 14A read with rule 8D(iii) is not warranted since the correct fact in the matter is that assessee has not earned any exempt income during the year. Decided in favour of assessee.

Summary

Issues involved:
The appeal involves the disallowance of expenses under section 14A of the Income-tax Act, 1961 read with rule 8D(iii) of the Income-tax Rule, 1962.

Summary:
The assessee filed an appeal against the order of the Ld. CIT(A) regarding the disallowance of expenses under section 14A of the Act. The case revolved around the disallowance of Rs. 5,49,842 made by the Ld. AO under section 14A of the Act, alleging that the assessee claimed long-term capital gains as exempt income. The Ld. AO computed the disallowable expenditure related to income not included in the total income and added it to the assessee's income, affecting the carry forward of business loss. The assessee contended that no exempt income was earned during the year and therefore no disallowance was warranted. The Ld. CIT(A) upheld the Ld. AO's decision, leading the assessee to appeal before the Tribunal.

The Ld. Counsel for the assessee argued that no exempt income was earned during the year, thus no disallowance should be made under section 14A. The Ld. Senior DR referred to a retrospective amendment in section 14A by the Finance Act, 2022, stating that disallowance could be made even if no tax-free income was earned by the assessee.

The Tribunal noted that the assessee reported long-term capital gains as taxable income, set off against business loss, and did not earn any exempt income. The disallowance made by the Ld. AO was deemed unwarranted as the assessee had not earned any exempt income. Referring to a decision by the Hon'ble Delhi High Court, the Tribunal held that no disallowance was required in the absence of tax-free income. Accordingly, the Tribunal allowed the appeal, deleting the disallowance made by the Ld. AO.

In conclusion, the Tribunal allowed the appeal of the assessee, ruling that no disallowance under section 14A was necessary due to the absence of tax-free income.