2016 (6) TMI 1474 - AT - Income Tax

Tribunal overturns decision on section 14A disallowance, emphasizes accurate scrutiny of accounts

Kamal Kumar Jagdish Prasad Lath Versus Jt. Commr. of Income tax, Khandwa Range, Indore.

The Tribunal set aside the lower authorities' decision to add Rs. 9,75,979 under section 14A of the Act, directing the Assessing Officer to reassess the ... Addition u/s 14A r.w.r. 8D - computation or disallowance made of expenses incurred in earning exempt income - mandation of recording satisfaction before making addition - HELD THAT:- As decided in Joint Investment Pvt. Ltd [2015 (3) TMI 155 - DELHI HIGH COURT] By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. For the above reasons, the impugned order of the ITAT is set aside. The question of law is answered in favour of the assessee. Thus we set aside the orders of the authorities below with the direction to the Assessing Officer to consider the above High Court judgments cited above and decide the issue in view thereof. Appeal is allowed for statistical purposes only. Issues Involved:Appeal against addition under section 14A of the Act.Analysis:The appellant contested the addition of Rs. 9,75,979 under section 14A of the Act, arguing that the CIT(A) erred in upholding the Assessing Officer's decision. The appellant initially self-disallowed Rs. 28,339, but later revised it to Rs. 55,839, based on half a percent of total investments. However, Rule 8D mandates a different calculation method. The Assessing Officer made the disallowance as per Rule 8D, leading to the appeal.The appellant relied on legal precedents, including judgments from the Bombay High Court and various Tribunals, to support their case. They argued that the CIT(A) failed to provide reasons for upholding the Assessing Officer's decision. Citing the Delhi High Court's ruling, the appellant emphasized the need for a thorough examination of the accounts before applying Rule 8D. The appellant's counsel highlighted the importance of assessing interest receipts and payments for accurate computation.On the other hand, the Departmental Representative supported the lower authorities' decisions and referred to a CBDT Circular. The Tribunal considered the arguments from both sides and referenced the Delhi High Court's judgment in a similar case. The High Court's ruling emphasized the necessity of scrutinizing the accounts before making disallowances under section 14A. It noted discrepancies in the disallowance amount, stating that it should only cover expenses related to tax-exempt income, not the entire income.Consequently, the Tribunal set aside the lower authorities' orders and directed the Assessing Officer to reevaluate the case in light of the High Court judgments. The Tribunal allowed the appeal for statistical purposes only, based on the legal principles discussed in the judgment.