2020 (10) TMI 1381 - AT - Income Tax

Section 14A disallowance cannot exceed exempt income earned by assessee, expenditure restriction upheld

The ITAT Jaipur held that disallowance under Section 14A cannot exceed the exempt income earned by the assessee. The tribunal relied on precedents from ... Disallowance u/s 14A - expenditure incurred by the assessee in relation to tax exempt income - HELD THAT:- As relying on Joint Investments Pvt. Ltd [2015 (3) TMI 155 - DELHI HIGH COURT] and Daga Global Chemicals Pvt. Ltd. [2015 (1) TMI 1204 - ITAT MUMBAI] window for disallowance is indicated in Section 14A of the Act and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. Therefore, this proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. We are of the view that the disallowance made U/s 14A of the Act cannot exceed the exempt income, hence, we direct the A.O. to restrict the disallowance U/s 14A of the Act to the extent of exempt income earned by the assessee. With this direction, we partly allow this ground of appeal. Issues Involved:- Challenge to the order of the ld. CIT(A) sustaining disallowance under section 14A of the Income Tax Act, 1961.Detailed Analysis:1. Background and Facts:- The assessee, engaged in manufacturing barley malt and trading agro products, filed a return declaring a loss for the relevant year.- The Assessing Officer (A.O.) selected the case for scrutiny and made a disallowance under section 14A of the Act, adding it to the total income.- The assessee appealed to the ld. CIT(A) who upheld the A.O.'s decision, leading to the appeal before the ITAT.2. Arguments of the Assessee:- The primary contention was against the disallowance of Rs. 5,18,894 under section 14A.- The assessee argued that the exempted income from dividend was minimal compared to the overall revenue.- It was highlighted that no direct expenditure was incurred for earning the exempt income, hence Rule 8D could not be invoked.- Case laws and judicial precedents were cited to support the argument that disallowance should be restricted to the exempt income earned.3. Revenue's Stand and ITAT's Decision:- The revenue authorities contended that there was no direct nexus between borrowed funds and investments, leading to the disallowance.- Citing the Delhi High Court and Mumbai Tribunal decisions, the ITAT emphasized that disallowance under section 14A should not exceed the exempt income earned.- The ITAT directed the A.O. to restrict the disallowance to the extent of the exempt income, partly allowing the appeal of the assessee.4. Conclusion:- The ITAT's decision clarified the principle that disallowance under section 14A should be limited to the exempt income earned, preventing the entire amount from being disallowed.- The case highlighted the importance of establishing a direct connection between expenditure and income to justify disallowance, as per the provisions of the Act and judicial interpretations.This detailed analysis of the judgment showcases the key arguments, legal principles, and the final decision rendered by the ITAT in the case concerning the disallowance under section 14A of the Income Tax Act, 1961.