2017 (10) TMI 234 - AT - Income Tax

Disallowance u/s.14A - CIT(A) restricting the addition by applying Rule 8D - Held that - After considering the submissions of ld. DR and the material on record, it is noticed that the ld. CIT(A) by following the judgment of the Hon ble Jurisdictional High Court in the case of Joint Investment (P) Ltd. Vs CIT 2015 (3) TMI 155 - DELHI HIGH COURT sustained the disallowance to ₹ 7,000/-. We, therefore, do not see any valid ground to interfere with the findings of the ld. CIT(A). Accordingly, we do not see any merit in this appeal of the department. - Decided against revenue

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act, 1961
- Application of Rule 8D for disallowance calculation
- Exempt income and disallowance amount discrepancy

Analysis:
1. Disallowance under section 14A of the Income Tax Act, 1961:
The case involved the disallowance of expenses under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed an amount of &8377; 38,94,340/- based on the investments made by the assessee in various companies. The AO's decision was challenged by the assessee, arguing that the disallowance was not justified as there was only a nominal income of &8377; 7,000/- received from dividends.

2. Application of Rule 8D for disallowance calculation:
The AO computed the disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962. Rule 8D provides a method for calculating the disallowance relating to expenses incurred in earning exempt income. The AO applied Rule 8D to determine the disallowance amount, considering factors such as interest expenditure, average value of investments, and total assets.

3. Exempt income and disallowance amount discrepancy:
The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the disallowance but restricted it to the amount of exempt income earned by the assessee, which was &8377; 7,000/-. The CIT(A) noted that the disallowance of &8377; 38,94,340/- was excessive compared to the exempt income. Citing relevant case laws, the CIT(A) emphasized that the disallowance under section 14A cannot exceed the amount of exempt income. The decision was based on the principle that the disallowance should be proportionate to the exempt income earned.

4. Judgment and Conclusion:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision to restrict the disallowance to &8377; 7,000/-. The ITAT found no valid grounds to interfere with the CIT(A)'s findings, citing precedents and legal principles. As a result, the department's appeal was dismissed, affirming the limited disallowance of &8377; 7,000/- as the appropriate amount based on the exempt income earned by the assessee.