2016 (11) TMI 1681 - AT - Income Tax

Tribunal limits disallowance of expenses under section 14A to actual exempt income, providing clarity on tax treatment.

Maharashtra Agro Industries Development Corporation Ltd Versus Asst. Commissioner of Income Tax, Circule 6 (3) Mumbai,

The Tribunal partially allowed the assessee's appeal, directing the Assessing Officer to restrict the disallowance of expenses related to exempted income ... Disallowance u/s 14A r.w.r. 8D - disallowing the expenses relatable to exempted income - HELD THAT:- Admittedly, the only exempted income earned by assessee on account of dividend is ₹ 20,000/-. As we find that this issue is covered in favour of assessee as far as restricting the disallowance to the extent of exempted income only and for this placing reliance on the case of Daga Global Chemicals Pvt. Ltd. [2015 (1) TMI 1204 - ITAT MUMBAI] direct the AO to restrict the disallowance at ₹ 20,000/- and hence, this issue of the assessee’s appeal is partly allowed. Issues:Disallowance of expenses relatable to exempted income u/s 14A of the Income Tax Act, 1961.Analysis:The appeal dealt with the disallowance of expenses related to exempted income under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed a sum of Rs. 5,25,322 as expenses relatable to exempted income, specifically dividend income of Rs. 20,000 claimed as exempt by the assessee. The AO invoked section 14A r.w.s rule 8D of the Income Tax Rules, 1962 to make the disallowance. The CIT (A) confirmed the AO's action. The assessee, aggrieved by this decision, appealed before the Tribunal. The only exempted income earned by the assessee was on account of dividend amounting to Rs. 20,000. The Tribunal referred to a Co-ordinate Bench decision in a similar case and held that the disallowance should be restricted to the extent of the exempted income only. The Tribunal directed the AO to restrict the disallowance to Rs. 20,000, partly allowing the appeal of the assessee. The Tribunal's decision was supported by a recent judgment of the Hon'ble Delhi High Court in a related case.This judgment clarifies the application of section 14A concerning the disallowance of expenses related to exempted income. It emphasizes that the disallowance cannot exceed the amount of exempt income earned. The Tribunal's decision was based on precedent and upheld the principle that disallowance under section 14A r.w.s rule 8D should be limited to the actual exempt income received. The judgment provides clarity on the interpretation and application of section 14A in cases where expenses are incurred in relation to exempted income, ensuring a fair and reasonable approach in determining the disallowance amount.