2019 (11) TMI 141 - AT - Income Tax

Tribunal limits disallowance under section 14A to align with exempt income

Dhruvi Securities Pvt. Ltd. Versus The Assistant Commissioner of Income Tax, Circle 2 (1) (2), Bangalore.

The Tribunal partially allowed the appeal of the assessee, directing the Assessing Officer to restrict the disallowance under section 14A to the extent of ... Disallowance of expenses incurred in earning income which does not form part of total income under Chapter III u/s 14A - HELD THAT:- Disallowance u/s. 14A of the Act in the present assessment year should also be restricted to the income earned by the assessee, which does not form part of the total income under the Act, which is a sum of ₹ 4,11,628 being dividend income exempt u/s. 10(34) & (35) of the Act and long term capital gain of ₹ 2,06,84,487 earned on sale of Kotak shares which is exempt u/s. 10(38) of the Act. We hold and direct accordingly. Issues:Disallowance of expenses under section 14A of the Income Tax Act, 1961.Analysis:The judgment by the Appellate Tribunal ITAT Bangalore dealt with the appeal by the assessee against the order of the CIT(Appeals) regarding the disallowance of expenses under section 14A of the Income Tax Act, 1961. The only issue in consideration was the disallowance of expenses incurred in earning income not forming part of the total income under Chapter III of the Act by invoking section 14A. The assessee, a company engaged in financing and investment, had filed a return of income for the assessment year 2013-14 declaring income of Rs. 3,75,18,920. The Assessing Officer (AO) disallowed Rs. 24,88,20,868 under section 14A, which was calculated based on Rule 8D of the Income-tax Rules. The disallowance included interest expenses and investments as on specific dates. The CIT(Appeals) restricted the disallowance to Rs. 24,90,96,229. However, the assessee appealed to the Tribunal seeking further relief.The Tribunal referred to previous decisions and held that the disallowance under section 14A should be limited to the income earned by the assessee that does not form part of the total income under the Act. It considered the exempt dividend income and long-term capital gains earned by the assessee and directed the AO to restrict the disallowance accordingly. The Tribunal emphasized that the disallowance cannot exceed the exempt income earned by the assessee. Citing relevant case laws and decisions, the Tribunal concluded that the disallowance under section 14A should be aligned with the exempt income earned, ensuring a fair and accurate calculation. Consequently, the Tribunal partly allowed the appeal of the assessee, directing the AO to restrict the disallowance under section 14A to the extent of income that does not form part of the total income under the Act, based on the specific exempt income earned by the assessee during the assessment year.In summary, the judgment provided clarity on the application of section 14A of the Income Tax Act, emphasizing that the disallowance of expenses should be restricted to the income earned by the assessee that does not form part of the total income under the Act. The Tribunal's decision was based on previous rulings and aimed to ensure a fair and accurate calculation of the disallowance under section 14A, aligning it with the exempt income earned by the assessee.