2018 (2) TMI 428 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D(2)(iii) - Held that - The disallowance should not be more than dividend income. Further in this case the assessee itself has disallowed expenses of ₹.6,15,628/- which is more than the dividend income of ₹.5,20,000/- earned during this assessment year. Therefore, there should not be any further disallowance u/s. 14A r.w. Rule 8D of the I.T. Rules. Thus we direct the Assessing Officer to delete the disallowance made u/s. 14A r.w.Rule 8D(2)(iii) of I.T Rules. - Decided in favour of assessee.

Summary

Issues:
Disallowance made under section 14A r.w. Rule 8D(2)(iii) of the I.T. Rules.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the Assessment Year 2010-11 regarding the disallowance made under section 14A r.w. Rule 8D(2)(iii) of the I.T. Rules. The assessee had received dividend income of ?5,20,000 during the assessment year and voluntarily disallowed ?6,15,628 towards expenses incurred for earning the dividend income. The Assessing Officer computed the disallowance under Rule 8D(2)(iii) at ?1,02,54,975, reducing it by the amount voluntarily disallowed by the assessee. The Commissioner upheld this disallowance. The assessee argued that since the disallowed expenses exceeded the dividend income earned, no further disallowance should be made under section 14A r.w. Rule 8D.

The Dispute Resolution Panel and the Commissioner's orders were challenged by the assessee. The Tribunal observed that the disallowance under section 14A r.w. Rule 8D should not exceed the dividend income earned by the assessee. As the assessee had already voluntarily disallowed expenses higher than the dividend income, the Tribunal held that no further disallowance should be made under Rule 8D. Citing a similar decision in the case of M/s. Pest control India Pvt Ltd. v. DCIT, the Tribunal emphasized that the disallowance cannot surpass the exempt income.

Referring to judgments such as the one by the Hon'ble Delhi High Court in the case of Joint Investment Private Limited, the Tribunal reiterated that section 14A or Rule 8D should not be interpreted to mean that the entire tax-exempt income must be disallowed. Following the decision in the case of Sanghavi Exports International P. Ltd v. ACIT, the Tribunal directed the Assessing Officer to restrict the disallowance to the extent of the dividend income earned by the assessee and delete the excess amount for computation of income. Consequently, the Tribunal allowed the appeal of the assessee and directed the deletion of the disallowance made under Rule 8D(2)(iii) of the I.T. Rules.

In conclusion, the Tribunal held that the disallowance should not exceed the dividend income earned by the assessee, especially when the assessee had already voluntarily disallowed expenses exceeding the dividend income. The Tribunal relied on previous judgments to support its decision and directed the Assessing Officer to delete the excess disallowance amount and compute the income accordingly.