Tribunal Rules Disallowance Can't Exceed Tax-Free Income, Rejects Automatic Rule 8D Application for Fair Tax Assessment.
The DCIT Circle-4, Ludhiana Versus M/s Aarti Steels Ltd.
The DCIT Circle-4, Ludhiana Versus M/s Aarti Steels Ltd. - TMI
Issues:1. Disallowance under section 14A of the Income Tax Act, 1961, r.w. Rule 8D(ii).
Analysis:The appeal was filed by the Revenue against the order of the Ld. CIT(A)-2, Ludhiana regarding the disallowance under section 14A of the Income Tax Act, 1961, r.w. Rule 8D(ii). The Revenue raised the issue of whether the Ld. CIT(A) was justified in deleting the disallowance. The assessee company, engaged in cotton and polyester yarn manufacturing, earned dividend income during the year. The Assessing Officer added a significant amount to the income of the assessee under section 14A r.w.r. 8D of Income Tax Rule, 1962 due to exempt income earned under section 10 of the Income Tax Act, 1961.
The Ld. CIT(A) restricted the addition to a nominal amount based on a previous decision by ITAT, Chandigarh in a similar case. The argument presented by the Ld. DR emphasized the automatic application of Section 14A Rule 8D, stating that expenses are incurred once investments are made, irrespective of income earned. Conversely, the Ld. AR argued that the disallowance should not exceed the tax-free income earned by the assessee. The Tribunal considered the arguments and referred to previous judgments by Delhi High Court, Gujarat High Court, and Punjab & Haryana High Court, which established that if no tax-free income is earned, disallowance under section 14A cannot be made. The Tribunal disagreed with the notion that Rule 8D is mandatory in all cases, emphasizing that disallowance should be limited to the tax-free income earned by the assessee.
As a result, the Tribunal directed the Assessing Officer to restrict the disallowance to the amount of tax-free income earned by the assessee, leading to the dismissal of the Revenue's appeal. The judgment highlighted the importance of considering the actual tax-free income earned by the assessee when determining the disallowance under section 14A of the Income Tax Act, 1961, r.w. Rule 8D(ii).