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2024 (11) TMI 491 - AT - Income Tax


Issues:
1) Whether investments that yielded exempt income are the only ones to be considered for disallowance under section 14A r/w Rule 8D(2)?
2) Whether penal charges paid to NHB are allowable as business expenditure?

Analysis:

Issue 1:
The appeal involved a dispute regarding the disallowance of certain expenses under section 14A of the Income Tax Act. The assessing officer disallowed an amount under section 14A, which was later partly allowed by the CIT(A). The key contention was whether only investments that yielded exempt income should be considered for disallowance. The appellant revenue argued that all investments, including those not earning exempt income, should be considered for disallowance as per the clarificatory explanation of section 14A(1). However, the CIT(A) followed the decision of the Special Bench of ITAT Delhi and the Bombay High Court, holding that only investments yielding exempt income should be considered for disallowance. The ITAT upheld the CIT(A)'s decision, citing precedents and relevant legal provisions, thereby ruling in favor of the assessee.

Issue 2:
The second issue pertained to whether penal charges paid to NHB were allowable as business expenditure. The assessing officer disallowed the penalty amount, but the CIT(A) overturned this decision. The ITAT referred to relevant case laws and the Supreme Court judgment in CIT v Ahmedabad Cotton Mfg Co. Ltd (1993) to support the position that penal charges, if incurred as part of business operations and not as a punishment for a legal breach, could be considered as deductible business expenditure under section 37 of the Income Tax Act. The ITAT agreed with the CIT(A)'s decision, emphasizing that the penal charges imposed by NHB were incidental to the business and not a result of any legal offense. Consequently, the ITAT ruled in favor of the assessee, dismissing the revenue's appeal.

In conclusion, the ITAT upheld the CIT(A)'s decision on both issues, ruling in favor of the assessee and dismissing the revenue's appeal.

 

 

 

 

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