Tribunal limits disallowance under Section 14A to actual dividend income earned, deletes Rule 8D(2)(ii) disallowance

The Tribunal partly allowed the appeal, directing the Assessing Officer to restrict the disallowance under Section 14A to the actual dividend income earned. The disallowance under Rule 8D(2)(ii) was deleted as there was no evidence of expenditure for earning dividend income or diversion of borrowed funds. The disallowance under Rule 8D(2)(iii) for administrative expenditure was limited to the amount of dividend earned, in line with High Court judgments and legal principles.

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Issues:
Disallowance under Section 14A of the Income Tax Act.

Analysis:
The appeal was filed against the Commissioner of Income Tax (Appeals)'s order regarding the disallowance under Section 14A of the Income Tax Act. The assessee, engaged in professional advisory and financial consultancy services, filed its return declaring income. The Assessing Officer (AO) disallowed amounts under Rule 8D(2)(ii) and Rule 8D(2)(iii) for administrative expenditure. The Commissioner upheld the disallowance, leading to the appeal.

Before the Commissioner, the assessee argued against the disallowance, stating that borrowed funds were not used for investments and that no expenditure was incurred for earning the minimal dividend income. The Commissioner upheld the disallowance, leading to the appeal. The assessee referred to various case laws to support its contentions.

The Tribunal analyzed the facts and case laws cited. It noted that there was no finding that the assessee incurred any expenditure for earning the dividend income and that there was no diversion of borrowed funds. Consequently, the disallowance under Rule 8D(2)(ii) was deleted. Regarding the disallowance of a proportionate amount of investment value, the Tribunal referred to High Court judgments and held that the disallowance cannot exceed the exempt income earned. The disallowance under Rule 8D(iii) for administrative expenditure was restricted to the amount of dividend earned, following the principles laid down in various judgments.

In conclusion, the Tribunal partly allowed the appeal, directing the Assessing Officer to restrict the disallowance under Section 14A to the actual dividend income earned. The judgment was pronounced on 31st July 2018.

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