2017 (3) TMI 530 - AT - Income Tax

Addition u/s 14A r.w.r 8D - Held that - CIT(A) verified the books before giving a finding that investments were made in the earlier years out of own funds. No material was placed by Revenue to contradict the findings of CIT(A). Therefore, we hold that disallowance on that count is not warranted. Referring to subsidiary issue i.e., administrative expenditure. In the case of M/s. Daga Global Chemicals Pvt. Ltd., (2015 (1) TMI 1204 - ITAT MUMBAI) observed that disallowance under section 14A read with Rule 8D cannot exceed the exempt income. No other case law was placed before me wherein a different view was taken. Even if there is a different view, the one which is in favour of the assessee deserves to be accepted. Therefore, we hold that the disallowance if any, should not exceed ₹ 2,86,655. Learned Counsel for the Assessee, fairly admitted that if the disallowance is restricted to the exempt income he would not seriously press other grounds. The appeal is accordingly disposed of by restricting the disallowance to ₹ 2,86,655. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D.
2. Applicability of disallowance exceeding exempted income.
3. Disallowance of administrative expenditure for earning exempt income.

Analysis:

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D:
The case involved an appeal against the disallowance of ?14,90,799 under section 14A of the Income Tax Act, 1961 read with Rule 8D. The assessee argued that since the investments were made in group companies from earlier years and no activity was involved in the current year, no expenses could be attributed to the investments. The CIT(A) had confirmed the disallowance, but the Tribunal held that disallowance on this ground was not warranted as the investments were made from own funds in earlier years. Therefore, the disallowance under Rule 8D was deleted.

Issue 2: Applicability of disallowance exceeding exempted income:
The appellant contended that the disallowance of ?14,90,799 exceeded the exempted income of ?2,86,655 (dividend income). Citing a decision by the ITAT Mumbai Bench in a similar case, the appellant argued that the disallowance should not exceed the exempt income. The Tribunal agreed with this argument and held that the disallowance should not exceed the exempt income, restricting it to ?2,86,655. This decision was based on the principle that the disallowance under section 14A read with Rule 8D cannot surpass the exempt income.

Issue 3: Disallowance of administrative expenditure for earning exempt income:
The dispute also revolved around the disallowance of administrative expenditure for earning exempt income. The CIT(A) had upheld the disallowance of ?14,90,799 as administrative expenditure. However, the Tribunal, following the decision of the ITAT Mumbai Bench in a similar case, held that the disallowance for administrative expenditure should not exceed the exempt income. Therefore, the disallowance was restricted to ?2,86,655, the amount of exempt income earned by the assessee.

In conclusion, the Tribunal partially allowed the appeal, restricting the disallowance to ?2,86,655, in line with the exempt income earned by the assessee. The decision was based on the principle that the disallowance under section 14A read with Rule 8D should not exceed the exempt income.