2023 (7) TMI 557 - AT - Income Tax

Disallowance u/s 14A - As per assessee no exempted income earned by the assessee during the relevant assessment year - HELD THAT - Respectfully following the ratio of law as laid down in the case South Indian Bank Ld. 2021 (9) TMI 566 - SUPREME COURT we are of the view that if there is no exempt income, no disallowance can be made u/s. 14A r.w.r.8D, however, as fairly admitted by the ld. AR that there was a disclosure of exempt income therefore, the disallowance should be restricted to the said amount. Consequently, the order of the CIT(A) and ld. AO are set aside on this issue and it is directed to restrict the disallowance made u/s. 14A r.w.r.8D to the amount of actual exempt income earned by the assessee during the year. Appeal of the assessee is partly allowed.

Summary

Issues involved:
The appeal challenges the disallowance made under section 14A r/w Rule 8D for the assessment year 2014-2015.

Issue 1: Disallowance under Section 14A r/w Rule 8D
The appeal challenges the disallowance of Rs. 5,72,606 made under section 14A r/w Rule 8D. The appellant argues that no disallowance can be made u/s. 14A r.w.rule 8D if there was no exempted income earned during the relevant assessment year. The appellant relies on legal precedents to support this contention. The Tribunal notes that in the absence of utilization of interest-bearing funds for earning exempted income, and no other expenses incurred for this purpose, disallowance u/s 14A read with rule 8D cannot be made. As no interest-bearing funds were used for investment to earn exempted income, and no other expenses were incurred for this purpose, the disallowance is deemed not in accordance with the law. The Tribunal directs the AO to verify the actual exempted income earned by the assessee during the year and restrict the disallowance accordingly.

Issue 2: Judicial Precedents
The appellant argues that the disallowance under section 14A should not be invoked when no exempt income was earned during the year. Legal precedents are cited to support this argument, emphasizing that disallowance under section 14A should be restricted to the amount of exempt income for the assessment year. The Tribunal, following legal precedents and the principles laid down by the Hon'ble Supreme Court, holds that if there is no exempt income, no disallowance can be made u/s. 14A r.w.r.8D. However, since there was a disclosure of exempt income of Rs. 2990, the disallowance is restricted to this amount.

Issue 3: Mechanical Passing of Order
The appellant contends that the order of the Ld. CIT(A) was passed in a mechanical manner without recording satisfaction as mandated by Section 14A r/w Rule 8D of the Income Tax Act, 1961. However, the Tribunal's decision primarily focuses on the lack of exempt income and the applicability of disallowance under section 14A in such circumstances.

Conclusion:
The Tribunal partly allows the appeal, setting aside the orders of the Ld. CIT(A) and Ld. AO. It directs to restrict the disallowance made under section 14A r.w.r.8D to the actual exempt income earned by the assessee during the year, which is determined to be Rs. 2990.