Tribunal directs AO to exclude disallowed amounts, emphasizes guidance for accurate income computation.

The Tribunal allowed the appeal, directing the AO to recompute the income of the assessee by excluding the suo moto disallowed amount of Rs. 59,55,723/- and the disallowance of Rs. 2,97,347/- made by the AO. The Tribunal emphasized that revenue authorities must guide the assessee in computing true income and cannot enforce incorrect admissions by the assessee.

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Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Applicability of disallowance when no exempt income is earned.
3. Legitimacy of the CIT(A) granting relief beyond the return of income.

Detailed Analysis:

Disallowance under Section 14A:
The assessee challenged the disallowance of Rs. 2,97,347/- made by the AO under section 14A of the Income Tax Act, 1961, read with rule 8D(2)(iii) of the Income Tax Rules. The AO observed that the assessee did not calculate the disallowance using the prescribed formula and instead disallowed a sum of Rs. 6,275/- under administrative expenses. The AO applied the formula and worked out a disallowance of Rs. 2,97,347/-, which was confirmed by the CIT(A).

Applicability of Disallowance When No Exempt Income is Earned:
The assessee argued that since there was no tax-free income, no expenditure was required to be disallowed under section 14A. This argument was supported by the decision of the Hon'ble Gujarat High Court in the case of Corrtech Energy P. Ltd. The Tribunal noted that various courts, including the Hon'ble Delhi High Court and the Hon'ble Madras High Court, have held that disallowance under section 14A cannot be made when no exempt income is earned. The Tribunal referenced decisions where it was ruled that section 14A can only be triggered if the assessee seeks to offset expenditure against income that does not form part of the total income under the Act.

Legitimacy of CIT(A) Granting Relief Beyond the Return of Income:
The Tribunal considered whether the CIT(A) was justified in granting relief on disallowance that the assessee had suo moto made in its return of income. It was argued that the CIT(A) could remove the disallowance even if the assessee did not file a revised return. The Tribunal endorsed the CIT(A)'s view that a mistake or inadvertence by the assessee, leading to over-assessment, does not estop the assessee from claiming relief. The Tribunal cited several judgments, including CIT vs. Shelly Products and S. R. Koshti vs. CIT, which emphasized that tax authorities must ensure only legitimate tax dues are collected.

The Tribunal concluded that the CIT(A)'s action in granting relief under section 14A, despite the assessee's initial disallowance, was justified. The Tribunal noted that the decision of Corrtech Energy P. Ltd. clarified the law that no disallowance under section 14A is warranted if no exempt income is earned, and this should have been considered by the AO and CIT(A) during the assessment.

Conclusion:
The Tribunal allowed the appeal, directing the AO to recompute the income of the assessee by excluding the suo moto disallowed amount of Rs. 59,55,723/- and the disallowance of Rs. 2,97,347/- made by the AO. The Tribunal emphasized that the revenue authorities must guide the assessee in computing true income and cannot enforce incorrect admissions by the assessee.

Pronouncement:
The appeal of the assessee was allowed, and the judgment was pronounced in the Open Court on 27th May 2020.

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