2020 (10) TMI 1026 - HC - Income Tax

Disallowance u/s 14A r.w. Rule 8D(2)(ii) - as argued disallowance u/s 14A r.w. Rule 8D cannot exceed disallowance made in the return of income - HELD THAT - The amount of disallowance under Section 14A read with Rule 8D of the Rules cannot exceed the amount of disallowance made by the assessee in the return of income. We are of the view that such observations made by the Tribunal should be looked into in the context and the facts available in the present case. The observations should not be construed or understood to mean that the aforesaid disallowance cannot exceed the s uo motu disallowance made by the assessee in the return of income. In some cases, applying the formula laid down in Rule 8D, the disallowance may exceed such suo motu disallowance made by the assessee.

Summary

Issues:
1. Interpretation of Section 14A r.w. Rule 8D under the Income Tax Act, 1961.
2. Disallowance of interest expenditure on exempt income.
3. Jurisdictional error in the Tribunal's order.

Issue 1: Interpretation of Section 14A r.w. Rule 8D under the Income Tax Act, 1961:
The case involved a tax appeal under Section 260A of the Income Tax Act, 1961, initiated by the Revenue against an order of the Income Tax Appellate Tribunal regarding the disallowance of interest expenditure under Section 14A r.w. Rule 8D(2)(ii). The Assessing Officer found the assessee's suo motu disallowance arbitrary and illogical, leading to a disallowance of ?52,65,01,883. The CIT (A) restricted the disallowance to ?1,38,04,106, and the Tribunal further reduced it based on precedents and the amount of exempted income declared by the assessee.

Issue 2: Disallowance of interest expenditure on exempt income:
The Tribunal, citing relevant judgments, held that the disallowance under Section 14A r.w. Rule 8D cannot exceed the amount of exempted income, emphasizing that the disallowance made by the assessee in the return of income sets a limit. The Tribunal referred to the decision in CIT vs. Corrtech Energy Private Ltd and PCIT Vs. State Bank of Patiala to support its stance. Consequently, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, confirming the deletion of the disallowance made by the Assessing Officer and CIT (A).

Issue 3: Jurisdictional error in the Tribunal's order:
The High Court, after hearing both parties, found no material infirmity or jurisdictional error in the Tribunal's order. The Court clarified that while the Tribunal's observation that the disallowance under Section 14A r.w. Rule 8D cannot exceed the amount of disallowance made by the assessee in the return of income should be considered in context. The Court emphasized that in some cases, the disallowance calculated as per Rule 8D may surpass the assessee's suo motu disallowance. With this clarification, the Court dismissed the Revenue's appeal.

This detailed analysis of the judgment addresses the interpretation of Section 14A r.w. Rule 8D, the disallowance of interest expenditure on exempt income, and the jurisdictional error in the Tribunal's order, providing a comprehensive overview of the legal issues involved in the case.