2016 (9) TMI 1205 - AT - Income Tax

Tribunal Limits Disallowance under Section 14A

The Tribunal restricted the disallowance under section 14A to the amount voluntarily offered by the assessee, considering the sufficiency of own funds for ... Addition u/s 14A - Held that:- The Hon’ble Delhi High Court in the case of Joint Investment Private Limited (2015 (3) TMI 155 - DELHI HIGH COURT) has held that section 14 of the Act or rule 8D cannot be interpreted so as to mean that the entire tax exempt income of the assessee is to be disallowed. That 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 of tax exempt income. As the assessee has claimed exempt dividend income of ₹ 6,75,076/- and exempt long term capital gain of ₹ 19,62,821/-. The AO, however, made a disallowance of ₹ 2,65,36,592/- in relation to expenditure incurred for earning of the above exempt income. The assessee itself has disallowed an amount of ₹ 4,70,062/- in its computation of income. Considering the proposition of law laid down the disallowance in this case is restricted to the extent that is suo-moto offered by the assessee at ₹ 4,70,062/-. In view of the above, the appeal of the assessee is treated as partly allowed Issues involved: Disallowance under section 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962.Detailed Analysis:1. Issue of Disallowance under Section 14A:The judgment involves cross-appeals by the assessee and the Revenue against the Commissioner of Income Tax (Appeals) orders concerning disallowance under section 14A of the Income Tax Act, 1961. The Assessing Officer disallowed a substantial amount under section 14A read with rule 8D due to tax-exempt dividend income and long-term capital gains. The assessee contended that no expenses were incurred to earn the exempt income and had already disallowed a portion voluntarily. The Commissioner, relying on precedent, directed the exclusion of investments not yielding exempt income and considered net interest expenditure for disallowance. The assessee argued that as own funds exceeded investments, no interest disallowance should apply, and certain strategic investments should be excluded from disallowance calculations.2. Judicial Interpretation and Precedents:The judgment extensively references legal interpretations to support its decision. It cites the Hon'ble Bombay High Court's ruling in 'CIT vs. Reliance Utilities and Power Ltd.' emphasizing the presumption of using own funds for investments if sufficient. Additionally, the Hon'ble Delhi High Court's decision in Joint Investment Private Limited clarifies that only expenditure related to tax-exempt income should be disallowed under section 14A. Other High Courts' decisions further support this interpretation, emphasizing the actual receipt of exempt income for disallowance and restricting disallowance to the amount offered by the assessee.3. Decision and Outcome:The Tribunal, after considering the contentions and legal principles, restricted the disallowance to the amount voluntarily offered by the assessee, acknowledging the sufficiency of own funds for investments and the specific nature of certain investments. Consequently, the appeals of the assessee were partly allowed, while those of the Revenue were dismissed. The judgment underscores the importance of aligning disallowance under section 14A with actual expenses related to tax-exempt income and the availability of own funds for investments.In conclusion, the judgment provides a detailed analysis of the issues surrounding disallowance under section 14A, emphasizing legal interpretations, precedents, and the specific circumstances of the case to arrive at a balanced decision benefiting both the assessee and the Revenue.