2023 (2) TMI 956 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - contention of the assessee that assessee had earned tax free dividend of only Rs. 8.81 lacs whereas the disallowance made by AO u/s. 14A r.w.r. 8D and upheld by the Ld. CIT(A) is to the extent of Rs. 1.78 crores (rounded of) which is much in excess of the exempt income earned - HELD THAT - As in the case Caraf Builders Construction Pvt. Ltd. 2018 (12) TMI 410 - DELHI HIGH COURT has held that disallowance u/s.14A cannot exceed exempt income of the relevant year. In view of the settled position of law that the disallowance u/s. 14A cannot exceed exempt income and in view of the fact that the disallowance made u/s. 14A r.w.r 8D is much in excess of the exempt income, we direct the AO to restrict the disallowance u/s. 14 r.w.r 8D to the extent of exempt income earned by the assessee. Before us, though the assessee has stated that it has earned exempt tax free dividend income of Rs. 8.81 lacs but we find that there is no finding by the lower authorities of the exempt income earned by the assessee. AO is therefore directed to work out the disallowance u/s. 14A r.w.r 8D after considering the submissions of the assessee with respect to the exempt income earned and in accordance with law. Decided in favour of assessee for statistical purposes.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act for the assessment years 2013-14 and 2014-15.

Analysis:
1. Assessment Year 2014-15:
- The Assessee, a consultancy company, filed its return for A.Y. 2014-15 declaring income of Rs. 11,80,27,710. The AO disallowed Rs. 1,77,99,597 u/s. 14A r.w.r 8D due to investments and interest paid. The Ld. CIT(A) upheld the AO's order.
- The Assessee contended that the disallowance u/s. 14A should be restricted to the tax-free dividend income earned during the year, citing relevant case laws. The DR supported the lower authorities' order.
- The Tribunal noted that the disallowance made was much higher than the exempt income earned. Referring to legal precedents, the Tribunal directed the AO to restrict the disallowance u/s. 14A r.w.r 8D to the extent of the exempt income earned by the Assessee. The AO was instructed to rework the disallowance considering the exempt income earned.

2. Assessment Year 2013-14:
- Both parties agreed that the facts for A.Y. 2013-14 were identical to A.Y. 2014-15. The Tribunal, following the decision for A.Y. 2014-15, allowed the Assessee's appeal and remitted the issue to the AO to compute the disallowance u/s. 14A r.w.r. 8D.
- Consequently, the Tribunal allowed the Assessee's appeal for A.Y. 2013-14 for statistical purposes, similar to A.Y. 2014-15.

In conclusion, the Tribunal allowed both appeals of the Assessee for statistical purposes, directing the AO to recompute the disallowance u/s. 14A r.w.r. 8D based on the exempt income earned.