2021 (7) TMI 530 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - Tribunal treating 3% of the exempt income as the expenditure to be disallowed u/s 14A - HELD THAT - As decided in M/S. ENVESTOR VENTURES LTD. 2021 (1) TMI 922 - MADRAS HIGH COURT disallowance under rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income-tax Rules, 1962. Also see HCL TECHNOLOGIES LTD. 2018 (5) TMI 357 - SUPREME COURT . - Decided in favour of the assessee.

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act.
2. Computation of deduction under Section 10B of the Income Tax Act, specifically the exclusion of telecommunication and travel expenses from total turnover.

Detailed Analysis:

1. Disallowance of Expenditure under Section 14A:
The primary issue revolves around the disallowance of expenditure under Section 14A of the Income Tax Act, read with Rule 8D. The assessee, a company engaged in providing customer support services, claimed dividend income as exempt under Section 10(34). The Assessing Officer (AO) invoked Section 14A, disallowing expenses attributable to earning the exempt income. The assessee's appeal to the Commissioner of Income Tax (Appeals) and subsequently to the Income Tax Appellate Tribunal (ITAT) upheld the AO's disallowance under Rule 8D.

The Revenue's appeal to the High Court raised substantial questions of law, including whether the Appellate Tribunal's method of treating 3% of exempt income as disallowable expenditure was against the statute, and whether the disallowance under Section 14A should strictly follow Rule 8D.

The High Court referenced the Supreme Court's judgment in [2018] 93 taxmann.com 33 (SC), which clarified that disallowance under Section 14A cannot exceed the exempt income itself. The court emphasized that the AO must record satisfaction that the apportionment of disallowable expenditure by the assessee is not acceptable, before resorting to Rule 8D.

2. Computation of Deduction under Section 10B:
The second issue pertains to the computation of deduction under Section 10B, specifically regarding the exclusion of telecommunication and travel expenses from the total turnover. The Revenue challenged the ITAT's decision to reduce these expenses from the total turnover for computing the deduction.

The High Court cited the Supreme Court's judgment in [2018] 93 taxmann.com 33 (SC), which held that expenses excluded from export turnover must also be excluded from total turnover to avoid an illogical and unjust result. The court reiterated that the formula for computing deduction under Section 10B should ensure that any exclusion from export turnover must also reflect in the total turnover.

The High Court also referenced the Division Bench's decision in [2021] 123 taxmann.com 378 (Madras), which reinforced that the disallowance of expenditure to earn exempt income cannot exceed the exempt income itself. The court emphasized that the AO must provide cogent reasons and record satisfaction before applying Rule 8D.

Conclusion:
The High Court concluded that the questions of law were already settled against the Revenue and in favor of the assessee, based on the Supreme Court and Division Bench's judgments. Consequently, the appeals were dismissed, affirming that disallowance under Section 14A cannot exceed the exempt income and that expenses excluded from export turnover must also be excluded from total turnover for Section 10B deductions.

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