2019 (10) TMI 71 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - CIT(A) failed to consider that the agricultural income is not a business income. Neither any expenditure has been claimed by the assessee in this regard. Hence, when there is no exempt income the disallowance is not permissible as the ratio laid down in the judgment passed by the Hon ble Jurisdictional High Court in the matter of Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT is thus applicable to the instant case. Thus we are of the considered view to delete the addition made by the Learned AO. The appeal is, therefore, allowed.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act, 1961 exceeding exempt income claimed by the assessee.
- Application of Rule 8D of the Income Tax Rule, 1962 for disallowance calculation.
- Consideration of interest free funds for investments and disallowance amount restriction.

Analysis:
1. Disallowance under Section 14A: The appeal was against the order passed by the Commissioner of Income Tax (Appeals) concerning disallowance under section 14A of the Income Tax Act, 1961. The assessee, engaged in real estate development and land investment, declared total income for Assessment Year 2013-14. The dispute arose when the Assessing Officer made a disallowance of &8377; 17,48,368 under section 14A, which the CIT(A) reduced to the exempt income claimed by the assessee, amounting to &8377; 95,000. The main contention was whether disallowance under section 14A can exceed the exempt income.

2. Rule 8D Application: The assessment was finalized applying section 14A read with Rule 8D of the Income Tax Rule, 1962, leading to the disallowance. The assessee argued that no disallowance should be made as no exempt income was claimed. The CIT(A) considered the assessee's contentions, including the availability of interest-free funds for investments, and relied on various judgments to support the position that disallowance cannot exceed the exempt income.

3. Interest Free Funds and Disallowance Restriction: The assessee had substantial interest-free funds available for investments, and it was argued that disallowance under section 14A should not exceed the amount of exempt income. The CIT(A) referred to judgments emphasizing that if there are sufficient interest-free funds from which investments are made, disallowance should be restricted. The CIT(A) directed the Assessing Officer to limit the disallowance to the exempt income of &8377; 95,000. The Tribunal concurred, emphasizing that when there is no exempt income, disallowance is not permissible, deleting the addition made by the Assessing Officer.

In conclusion, the Tribunal allowed the assessee's appeal, holding that disallowance under section 14A cannot exceed the amount of exempt income claimed by the assessee. The decision was based on the principles established in various judgments and the availability of interest-free funds for investments.