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2024 (5) TMI 1363 - AT - Income TaxDisallowance u/s 14A r.w.r 8D - Expenditure incurred on earning exempt income - HELD THAT - Undisputed fact shows that assessee has earned exempt income of 3 lacs during the year. Assessee did not offer any disallowance and stated that it has not incurred any expenditure which earned the exempt income. AO invoked the provisions of Section Rule 8D of the Act and made disallowance to the extent of total expenditure incurred. Now it is a settled position of law that disallowance in excess of exempt income cannot be sustained u/s 14A of the Act. Hon ble Karnataka High Court in Pragathi Krishna Gramin Bank 2018 (6) TMI 1283 - KARNATAKA HIGH COURT and in CIT vs. M/S. Corrtech Energy Ltd 2014 (3) TMI 856 - GUJARAT HIGH COURT has clearly held so. In case of HSBC Invest Direct (India) Ltd 2019 (2) TMI 731 - BOMBAY HIGH COURT has also held so that the disallowance u/s 14A of the Act cannot exceed the exempt income. In case of M/S Nirved Traders Pvt. Ltd. 2019 (4) TMI 1738 - BOMBAY HIGH COURT has clearly held so - Appeal of the assessee is allowed.
Issues:
Disallowance under Section 14A of the Income-tax Act, 1961 exceeding exempt income. Detailed Analysis: The appeal was filed by Quantum Advisors ESOP Trust against the appellate order passed by the National Faceless Appeal Centre, Delhi, wherein the appeal against the assessment order passed under Section 143(3) by the ITO ward 2(4), Mumbai, was partly allowed. The assessee raised grounds of appeal primarily related to the disallowance under Section 14A of the Act amounting to Rs. 28,43,433. The main contention was that the disallowance should be restricted to the extent of exempt income of Rs. 3,00,000. The assessee argued that as per the decision of the Bombay High Court, disallowance exceeding exempt income is not sustainable. The assessee, a Trust created for employees' stock option plans, earned dividend income of Rs. 3 lacs claimed as exempt under Section 10(34) of the Act. The total expenditure debited was Rs. 28,43,443, including interest. The Assessing Officer computed a disallowance under Section 14A of Rs. 31,51,890, but restricted it to the claimed expenditure amount. The CIT (A) confirmed this disallowance, leading to the current appeal. During the hearing, the Authorized Representative contended that the disallowance under Section 14A cannot exceed the exempt income. The Departmental Representative supported the lower authorities' order. The Tribunal analyzed the facts and legal precedents, noting that disallowance exceeding exempt income is not sustainable under Section 14A. Citing judgments by various High Courts, including Karnataka, Gujarat, and Bombay, the Tribunal allowed the appeal on ground no. 1.4, stating that the disallowance should not exceed the exempt income. The Tribunal dismissed all other grounds as they were not pressed by the assessee. Consequently, the appeal was partly allowed, with the disallowance under Section 14A restricted to the exempt income level. The order was pronounced in the open court on 28.05.2024.
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