2023 (4) TMI 944 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D - suo motto disallowance made by the assessee - HELD THAT - It is settled proposition of law that disallowance under section 14A read with Rule 8D cannot be more than the exempt income earned by the assessee. In the instant case the assessee has suo-moto disallowed an amount u/s 14A r.w.r. 8D which is more than the dividend income earned by the assessee. This issue has successfully been decided by cases of HSBC Invest Direct (India) Ltd. 2019 (2) TMI 731 - BOMBAY HIGH COURT and Nirved Traders Pvt Ltd 2019 (4) TMI 1738 - BOMBAY HIGH COURT , Oil Industry Development Board 2019 (3) TMI 1571 - SC ORDER and State Bank of India 2018 (11) TMI 1565 - SC ORDER that disallowance u/s 14A should be restricted to amount of exempt income of assessee only and not a higher income. Decided in favour of assessee.

Summary

Issues:
The issues involved in the judgment are the disallowance under section 14A read with Rule 8D and the restriction of disallowance made by the Assessing Officer.

Disallowance under Section 14A read with Rule 8D:
The appellant, an Asstt. Commissioner of Income Tax, sought to set aside the order passed by the National Faceless Appeal Centre regarding the disallowance under section 14A read with Rule 8D for the assessment year 2018-19. The appellant contended that the Commissioner of Income Tax (Appeals) erred in restricting the disallowance to a certain amount, whereas the Assessing Officer had computed a higher disallowance. The appellant, a private limited company engaged in investment activities, earned dividend income and made certain disallowances in the return filed. The Assessing Officer disallowed interest expenses and made a total disallowance under section 14A read with Rule 8D. The matter was taken to the Ld. CIT(A) who deleted the addition, leading the Revenue to appeal before the Tribunal.

Restriction of Disallowance:
The core issue to be decided was whether the Ld. CIT(A) rightly restricted the disallowance made by the AO under section 14A read with Rule 8D. The appellant had earned dividend income and self-disallowed an amount under section 14A read with Rule 8D. The Tribunal referred to various judgments, including those of the Hon'ble Bombay High Court and the Hon'ble Apex Court, which held that disallowance under section 14A cannot exceed the exempt income earned by the assessee. The Tribunal found that the disallowance made by the AO was far in excess of the exempt income earned by the appellant. Relying on precedents, the Tribunal restricted the disallowance to the amount self-disallowed by the appellant. The Tribunal dismissed the appeal filed by the Revenue, affirming the decision of the Ld. CIT(A) in restricting the disallowance.