2015 (4) TMI 1248 - AT - Income Tax

ITAT Reverses CIT(A) Order, Deletes Disallowance Under Section 14A

Radha Madhav Investments Ltd. Versus DCIT Cir- 3 (3), Mumbai

The ITAT allowed the appeal, reversing the CIT(A)'s order and deleting the disallowance made by the AO under section 14A of the Income Tax Act. The ITAT ... Disallowance u/s 14A with reference to investment in partnership firm - Held that:- Assessee has bifurcated the expenses relating to various branches which cannot be considered at all for the earning of the exempt income, which has been worked out at 1,16,01,123. Out of the balance amount, expenditure like godown rent and warehousing charges, other trading expenses insurance, foreign following travelling, business promotion etc. aggregating to ₹ 1.15 crores cannot be considered as expenditure incurred for the purpose of earning exempt income. The balance expenditure comes to 2.59 crores and if salary cost of approximately 2.12 crores is added then the same comes to ₹ 4.71 crores. If from the total expenditure of ₹ 4.71 crores, the assessee itself has disallowed ₹ 1,65,43,645/-, then definitely it can be held to be reasonable attribution for the purpose of disallowance u/s 14A. Thus, the disallowance made by the AO over and above the disallowance and confirmed by the Ld. CIT(A) is deleted and accordingly, the order of the Ld. CIT(A) on this score is reversed. - Decided in favour of assessee. Issues: Disallowance under section 14A of the Income Tax Act for expenses related to exempt income.Analysis:1. The appellant challenged the disallowance of expenses amounting to &8377; 1,90,52,701 under section 14A of the Income Tax Act related to investments in a partnership firm for the assessment year 2009-10. The appellant argued that section 14A should not apply to investments in a partnership firm as the income is not exempt but taxed. They contended that no expenses were incurred for earning the exempt income, hence no disallowance should be made.2. The Assessing Officer noted that the assessee claimed dividend income and share of profit from a partnership firm as exempt from tax. The AO calculated a disallowance of &8377; 3,55,96,346 under Rule 8D, which was more than the amount offered by the assessee. The appellant argued that the disallowance was not in accordance with Rule 8D and that expenses were mostly for business purposes, not directly related to earning dividend income.3. The CIT(A) upheld the disallowance, citing a High Court decision and the substantial exempt income of the appellant. The appellant's argument that expenses were not directly related to earning exempt income was dismissed. The appellant then appealed to the ITAT, asserting that the AO did not have grounds to make further disallowance beyond what the assessee had already offered.4. The ITAT found that once the assessee had attributed expenses for disallowance, the AO should have examined the correctness of the claim before making further disallowance. The ITAT analyzed the expenses debited to the Profit & Loss Account and concluded that the disallowance made by the AO was not justified. They noted that the expenses were mostly for business purposes and that the disallowance offered by the assessee was reasonable.5. Consequently, the ITAT allowed the appeal, reversing the CIT(A)'s order and deleting the disallowance made by the AO. The ITAT emphasized the importance of assessing the correctness of expense claims before making disallowances under section 14A of the Income Tax Act.