2016 (5) TMI 531 - AT - Income Tax

Tribunal Limits Disallowance under Section 14A to Exempt Income

The Tribunal partly allowed the appeal, restricting the disallowance under Section 14A to the amount of exempt income earned by the assessee, i.e., Rs. ... Disallowance u/s 14A - Held that:- Assessee has earned dividend income at ₹ 2,07,300/- and it is also undisputed fact that assessee is engaged in the business of trading of shares and securities. From going through the decision of the co-ordinate bench referred and relied on by ld. AR in the case of M/s K. Ratanchand & Co. vs. ITO [2015 (10) TMI 2171 - ITAT AHMEDABAD ] wherein held that in such cases disallowance u/s 14A should not exceed exempt income earned by the assessee. Respectfully following the above decision of the co-ordinate bench in the case of M/s K. Ratanchand & Co. vs. ITO (supra), we are of the view that on the given facts and circumstances of the case, disallowance u/s 14A of the Act should be restricted to the extent of exempt income earned by the assessee at ₹ 2,07,300/-. - Decided partly in favour of assessee Issues Involved:1. Delay in filing the appeal.2. Disallowance under Section 14A of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Delay in Filing the Appeal:The appeal was filed late by 62 days. The assessee explained that the delay was due to urgent travel to his native place in Uttar Pradesh because of his mother's ill health and other family problems. The last date for filing the appeal was 29.11.2012, but the assessee returned only in the third week of January 2012. The Tribunal considered the affidavit submitted and found the reasons sufficient to condone the delay, thus admitting the appeal for hearing.2. Disallowance under Section 14A of the Income Tax Act, 1961:The assessee, a private limited company engaged in trading gold, silver, shares, and securities, filed its return of income declaring a total income of Rs. 7,08,732/-. During the assessment, it was found that the assessee earned dividend income of Rs. 2,07,300/- from mutual funds and shares but did not disallow any expenditure under Section 14A for earning exempt income. The Assessing Officer applied Rule 8D of the IT Rules, 1962, and disallowed Rs. 79,67,261/-, assessing the income at Rs. 86,75,993/-.On appeal, the CIT(A) confirmed the addition, stating that the disallowance was necessary as the assessee did not disallow any part of interest and other expenses related to investments resulting in exempt income. The CIT(A) noted that Rule 8D is applicable from the assessment year 2008-09, and the formula prescribed therein is mandatory for disallowance. The CIT(A) observed that the assessee paid interest on borrowed funds used for both business and investments and incurred substantial administrative expenses, part of which related to investments. Therefore, the CIT(A) upheld the disallowance as per Rule 8D.The assessee appealed to the Tribunal, arguing that the disallowance of Rs. 79,67,261/- was disproportionate to the exempt income of Rs. 2,07,300/-. The assessee contended that it was engaged in trading shares and securities, not as an investor, and the dividend income was incidental. The Tribunal referred to the decision in M/s K. Ratanchand & Co. vs. ITO, where it was held that disallowance under Section 14A should not exceed the exempt income earned. The Tribunal also cited similar decisions in Jivraj Tea Ltd. vs. DCIT and Zaveri Virjibhai Mandalia vs. ACIT, where it was held that disallowance cannot exceed the exempt income.The Tribunal concluded that the disallowance under Section 14A should be restricted to the extent of the exempt income earned by the assessee, which is Rs. 2,07,300/-. Hence, the Tribunal partly allowed the appeal, reducing the disallowance to Rs. 2,07,300/-.Conclusion:The appeal was partly allowed by the Tribunal, and the disallowance under Section 14A was restricted to the amount of exempt income earned by the assessee, i.e., Rs. 2,07,300/-. The delay in filing the appeal was condoned, and the appeal was admitted for hearing.