2023 (6) TMI 1115 - AT - Income Tax

Disallowance u/s.14A - Addition as against the exempt income which is out of the dividend income earned by the assessee - HELD THAT - This issue before us is no longer res integra as various courts including the Hon'ble Apex Court has held that disallowance u/s.14A read with rule 8D should not exceed the exempt income earned by the assessee. As decided in the case of Chalet Hotels Ltd. 2021 (1) TMI 1134 - ITAT MUMBAI wherein on similar facts where the assessee had made suo moto disallowance more than that of the exempt income earned for that year, it was held that the disallowance should be only to the extent of the exempt income earned and not more than that. We are of the considered view that disallowances u/s.14A r.w.r. 8D is to be restricted only to the extent of the exempt income earned by the assessee during the impugned year. We, therefore, direct the A.O. to recompute the income of the assessee accordingly. Hence, the ground raised by the assessee is allowed.

Summary

Issues involved:
The appeal challenges the order of the Commissioner of Income Tax (Appeals) related to disallowance under section 14A of the Income Tax Act, 1961 for the Assessment Year 2013-14.

Disallowance under section 14A:
The assessee, a private limited company engaged in various financial activities, voluntarily disallowed Rs.9,60,000 under section 14A of the Act in its return of income. The Assessing Officer (AO) made additions/disallowances in the assessment order, leading to a total income determination of Rs.7,24,04,830. Subsequently, the case was reopened under section 147 due to an error in computing disallowance under section 14A. The AO then determined total income at Rs.9,10,06,662. The Commissioner of Income Tax (Appeals) restricted the disallowance to Rs.9,60,000, citing relevant case law that disallowance under section 14A cannot exceed the exempt income earned by the assessee for that year.

Challenge to the Commissioner's order:
The assessee appealed the Commissioner's decision, arguing that the disallowance should not exceed the exempt income earned during the year. The Authorized Representative contended that the disallowance should not exceed the exempt income and cited relevant case law to support this argument. On the other hand, the Departmental Representative supported the Commissioner's decision, stating that since the assessee agreed to the disallowance, the appeal lacked merit.

Tribunal's decision:
The Tribunal observed that the assessee earned dividend income of Rs.7,29,565 during the year and had voluntarily disallowed Rs.9,60,000 under section 14A. Relying on precedent and relevant case law, the Tribunal held that disallowance under section 14A should not exceed the exempt income earned by the assessee. Citing a specific case, the Tribunal directed the AO to recompute the income accordingly, allowing the ground raised by the assessee and ultimately allowing the appeal.

Conclusion:
The Tribunal's decision favored the assessee, directing the AO to restrict the disallowance under section 14A to the extent of the exempt income earned during the year. The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 12.05.2023.