2019 (3) TMI 1857 - AT - Income Tax

Tribunal Confirms Limited Disallowance u/s 14A, Dismisses Revenue Appeal on Interest-Free Investment Funds.

The Tribunal upheld the CIT(A)'s decision to restrict the disallowance under Section 14A of the Income Tax Act to Rs. 19,311, aligning with the principle ... Disallowance u/s 14A r.w.r. 8D - assessee submitted before us that the disallowance u/s. 14A cannot be made more than the tax free income - HELD THAT:- We have also perused the relevant materials available on record and the order passed by the Hon’ble ITAT Surat Bench [2014 (9) TMI 131 - ITAT AHMEDABAD] as relied upon by the Ld. Advocate appearing for the assessee. We have also carefully considered the order passed by the Ld. CIT(A). It appears that relying upon the ratio as laid down by different High Court followed by the Coordinate Bench in several matters including the order passed by the Surat Bench the Ld. CIT(A) has restricted the disallowance to the exempt dividend income of ₹ 19,311/- since disallowance exceeding such exempt income is not permissible in law which does not call for any interference. We, therefore, uphold the same. Hence, Revenue’s appeal is thus devoid of any merit and thus dismissed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Applicability of Rule 8D for calculating disallowance.3. Justification of investment from interest-free funds.4. Limitation of disallowance to the extent of exempt income.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which restricted the disallowance under Section 14A from Rs. 91,25,846/- to Rs. 19,311/-. The assessee had declared total income and revised it subsequently, which was processed under Section 143(1) of the Act. During assessment, it was found that the assessee had shown investments and earned exempt dividend income under Section 10(35) of the Act. The Assessing Officer (AO) disallowed Rs. 91,25,846/- under Section 14A read with Rule 8D, considering it as expenses incurred for earning exempt income.2. Applicability of Rule 8D for Calculating Disallowance:The AO applied Rule 8D(2)(ii) and Rule 8D(2)(iii) to calculate the disallowance, attributing interest expenditure and administrative expenses respectively. The CIT(A), however, restricted the disallowance to Rs. 19,311/-, the amount of the dividend income, based on the principle that disallowance under Section 14A cannot exceed the exempt income. This decision was supported by various judgments, including those from the Hon’ble ITAT Ahmedabad and Hon’ble Delhi High Court, which held that disallowance should not exceed the tax-free income.3. Justification of Investment from Interest-Free Funds:The assessee argued that they had sufficient interest-free funds in the form of share capital, reserves, and accumulated profits, which were substantially higher than the investments made. The CIT(A) found this argument valid, noting that the assessee had ample interest-free funds to cover the investments. The AO’s disallowance under Rule 8D(2)(ii) was thus not justified as the interest-free funds were sufficient to make the investments.4. Limitation of Disallowance to the Extent of Exempt Income:The CIT(A) and subsequently the Tribunal upheld that the disallowance under Section 14A should be limited to the exempt income of Rs. 19,311/-. This was based on precedent cases where it was established that disallowance cannot exceed the exempt income. The Tribunal referenced the case of Chudgar Ranchhodlal Jethalal Vs. DCIT and other relevant judgments to support this decision. The Tribunal found no reason to interfere with the CIT(A)’s order and dismissed the Revenue’s appeal.Conclusion:The Tribunal upheld the CIT(A)’s decision to restrict the disallowance under Section 14A to Rs. 19,311/-, aligning with the principle that disallowance should not exceed the exempt income. The appeal by the Revenue was dismissed, affirming that the assessee had sufficient interest-free funds for their investments and that the AO’s larger disallowance was not justified.