Section 14A disallowance cannot exceed actual exempt income earned during assessment year

ITAT Bangalore held that disallowance under section 14A read with rule 8D cannot exceed the exempt income earned during the relevant assessment years. The assessee argued no expenditure was incurred to earn exempt income, and addition should be restricted to exempt income received. Following precedent in Century Real Estate Holdings Pvt. Ltd, the tribunal restricted disallowance for assessment years 2010-2011 and 2013-2014 to actual exempt income earned. Appeals were partly allowed.

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Issues:
- Disallowance u/s 14A of the I.T. Act should be restricted to the exempt income received for the relevant assessment years.

Analysis:
The Appellate Tribunal ITAT Bangalore heard appeals by the assessee against two orders of the CIT(A) for the assessment years 2010-2011 and 2013-2014. The main contention was the restriction of disallowance u/s 14A of the I.T. Act to the exempt income earned. The assessee argued that no disallowance was necessary as no expenditure was incurred to earn exempt income. Additionally, it was contended that the disallowance should not exceed the amount of exempt income earned. The assessee relied on the judgment of the Hon'ble Delhi High Court in a specific case. The CIT(A) had partly allowed the appeals and passed an order u/s 154 of the I.T. Act, restricting the disallowance amounts. The assessee appealed to the Tribunal, presenting a paper book with relevant documents.

The Tribunal considered the arguments and recent decisions, including one by the Bangalore Benches in a specific case. The Tribunal noted that the disallowance u/s 14A cannot surpass the exempt income earned during the relevant assessment years. Referring to previous judgments, the Tribunal emphasized that the disallowance should be limited to the extent of exempt income earned by the assessee. Based on these principles, the Tribunal restricted the disallowance for the assessment years 2010-2011 and 2013-2014 to the actual exempt income earned during those years. Consequently, the appeals filed by the assessee were partly allowed, and the order was pronounced on 20th October 2020.

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