2019 (5) TMI 953 - HC - Income Tax

Appeal Remitted for Correct Tax Rule Application: Disallowance Amount Emphasized

The Court remitted the matter back to the Assessing Authority for the correct application of Rule 8D and the computation of the disallowance amount under ... Disallowance u/s 14A r/w Rule 8D - disallowance of expenditure incurred to earn exempted income - HELD THAT:- We are of the opinion that the matter deserves to be remitted back to the Assessing Authority for correct application of Rule 8D and computation of disallowance amount u/s 14A as we are of the clear opinion that the disallowance under Section 14A cannot exceed the exempted income disclosed and assessed by the Assessing Authority. The purpose of Section 14A was very clear that the expenditure incurred to earn exempted income cannot be allowed as a deduction. Normally, in such cases the Tribunal has adopted the norm of 2% of exempted income as permissible disallowance under Section 14A of the Act. Therefore, the matter deserves to be examined by the Assessing Authority once again. This Appeal is disposed of without answering the Substantial Questions of Law raised by the Revenue and the matter is remitted back to the Assessing Authority for determination of disallowance under Section 14A Issues involved:Interpretation of Section 14A of the Income Tax Act regarding disallowance of expenditure to earn exempted income.Analysis:1. The main issue in this case was the interpretation of Section 14A of the Income Tax Act concerning the disallowance of expenditure incurred to earn exempted income. The Revenue filed an Appeal challenging the order of the Income Tax Appellate Tribunal, which had dismissed the Revenue's Appeal and allowed the Cross Objection filed by the Assessee for the Assessment Year 2010-2011.2. The crux of the matter before the Tribunal was the disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules. This provision allows for the disallowance of expenditure incurred to earn exempted income. The Assessee argued that the disallowance made by the Assessing authority was excessive and exceeded the exempted income in the hands of the Assessee, which is not permissible under the law.3. The counsel for the Revenue, on the other hand, supported the Impugned Order passed by the Assessing Authority. After hearing both parties, the Court concluded that the matter needed to be remitted back to the Assessing Authority for the correct application of Rule 8D and the computation of the disallowance amount under Section 14A of the Income Tax Act.4. The Court emphasized that the disallowance under Section 14A cannot exceed the exempted income disclosed and assessed by the Assessing Authority. The purpose of Section 14A is to ensure that the expenditure incurred to earn exempted income cannot be allowed as a deduction. The Court noted that the Tribunal usually adopts a norm of 2% of exempted income as permissible disallowance under Section 14A.5. Consequently, the Court disposed of the Appeal without addressing the Substantial Questions of Law raised by the Revenue and directed the matter to be reconsidered by the Assessing Authority for the determination of disallowance under Section 14A of the Income Tax Act. No costs were awarded in this judgment.