2018 (10) TMI 1894 - AT - Income Tax

ITAT Hyderabad: Disallowance under Section 14A cannot exceed exempt income. Rule 8D disallowance capped at dividend income.

The Appellate Tribunal, ITAT Hyderabad, held that the disallowance under section 14A of the Income Tax Act cannot exceed the exempt income earned by the ... Disallowance u/s 14A r.w.r. 8D - claim restricted to the exempt income earned by the assessee - HELD THAT:- We find that in the case of VBC Ferro Alloys Ltd [2018 (8) TMI 130 - ITAT HYDERABAD] to which both of us are the signatories, have followed the precedents on the issue to hold that the disallowance u/s 14A read with Rule 8D cannot exceed exempt income. We are of the opinion that the disallowance under Rule 8D cannot exceed the dividend income earned and claimed as exempt. The disallowance worked out under Rule 8D(iii) being administrative expenditure is restricted to the amount of dividend earned. AO is directed to modify accordingly. Ground is partly allowed. As the issue under consideration is materially identical to the said decision, following the conclusions drawn therein, we direct the AO to VBC Ferro Alloys Ltd., Hyd. [2018 (8) TMI 130 - ITAT HYDERABAD] delete the disallowance made u/s 14A r.w.r. 8D(2)(iii) as the disallowance u/s 14A cannot exceed the exempt income. - Decided against revenue. Issues:1. Disallowance under section 14A of the Income Tax Act.2. Restriction of disallowance to exempt income earned by the assessee.Issue 1: Disallowance under section 14A of the Income Tax Act:The case involved an assessee-company engaged in trading of iron & steel, which filed its return of income for the assessment year 2014-15, declaring NIL total income and a current year loss. During the assessment proceedings, the Assessing Officer (AO) observed dividend income and interest claimed as exempt from tax, leading to a disallowance under section 14A read with Rule 8D of the IT Rules, 1962. The AO disallowed an amount under section 14A, which was contested by the assessee before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) restricted the disallowance to the amount of exempt income earned by the assessee, relying on precedents. The Revenue, aggrieved by the relief granted, appealed before the Appellate Tribunal, ITAT Hyderabad.Issue 2: Restriction of disallowance to exempt income earned by the assessee:The Appellate Tribunal, in its judgment, referred to the decision in the case of VBC Ferro Alloys Ltd vs. ITO, where it was held that the disallowance under section 14A cannot exceed the exempt income earned. The Tribunal quoted relevant portions from the decision, emphasizing that the disallowance under Rule 8D cannot exceed the dividend income earned and claimed as exempt. Relying on various judgments and principles laid down by High Courts and Co-ordinate Benches, the Tribunal directed the Assessing Officer to delete the disallowance made under section 14A as it cannot exceed the exempt income. Consequently, the Tribunal dismissed the Revenue's appeal, following the same principles and conclusions drawn in previous cases.This judgment clarifies the principles governing the disallowance under section 14A of the Income Tax Act, emphasizing that the disallowance cannot exceed the exempt income earned by the assessee. The decision provides a detailed analysis of the issue, citing relevant precedents and legal provisions to support the restriction of disallowance to the amount of exempt income. The Tribunal's ruling serves as a significant interpretation of the law regarding disallowance under section 14A, providing clarity on the calculation and restriction of such disallowances based on the income earned by the assessee.