2017 (11) TMI 126 - HC - Income Tax

Disallowance U/s 14A - whether addition has to be limited to the quantum of income not forming part of the Total income of the assessee even when clear, explicit and unambiguous provisions of section 14A read with Rule 8D do not stipulate any such condition? - Held that - In Joint Investments Pvt. Ltd. v. Commissioner of Income Tax 2015 (3) TMI 155 - DELHI HIGH COURT has held that by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. - Decided in favour of the Assessee.

Summary

Issues: Revenue's appeal against ITAT order for AY 2011-12 regarding disallowance under Section 14A.

Analysis:
1. The appeal before the Delhi High Court pertains to the Revenue challenging an order passed by the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2011-12.

2. The primary issue raised by the Revenue is whether the ITAT was correct in law in limiting the disallowance under Section 14A to the quantum of income not forming part of the total income of the assessee, despite the absence of such a condition in the provisions of Section 14A read with Rule 8D.

3. The Court referred to the case of Joint Investments Pvt. Ltd. v. Commissioner of Income Tax, where it was emphasized that the Assessing Officer (AO) must provide reasons for rejecting the assessee's claim for disallowance under Section 14A. The Court highlighted the importance of scrutinizing the accounts and ensuring that the disallowance is proportionate to the tax-exempt income.

4. The Court noted that the entire tax-exempt income was ?48,90,000, but the disallowance directed amounted to ?52,56,197, which was significantly higher. It was emphasized that Section 14A and Rule 8D only allow for the disallowance of expenditure "incurred by the assessee in relation to the tax-exempt income," and not the entire tax-exempt income itself.

5. Consequently, the Court held that the question raised by the Revenue was answered against them and in favor of the Assessee. As a result, the appeal by the Revenue was dismissed by the Court.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Court's reasoning behind dismissing the Revenue's appeal in the matter related to disallowance under Section 14A for the Assessment Year 2011-12.