2020 (8) TMI 319 - AT - Income Tax

Tribunal limits disallowance under section 14A, partially allowing assessee's appeal.

The Tribunal dismissed the legal grounds raised by the assessee but partially allowed the appeal by restricting the disallowance under section 14A to the ... Disallowance u/s 14A - assessee received exempt income which is not part of the taxable income and it is clear from the computation of income - HELD THAT:- As relying on MAXOPP INVESTMENT LTD. [2018 (3) TMI 805 - SUPREME COURT] we restrict the disallowance u/s.14A of the Act upto the exempt income received by the assessee during the impugned assessment year. Issues Involved:1. Legality of the notice issued under section 263 by the Principal Commissioner of Income Tax (Pr. CIT).2. Jurisdictional error by Pr. CIT in passing the order under section 263.3. Consideration of section 14A disallowance by the Assessing Officer (AO).4. Opportunity provided to the assessee to present its case.5. Disallowance of expenditure towards interest paid under section 14A.6. Prejudicial impact of the assessment order to the interest of Revenue.Issue-wise Detailed Analysis:1. Legality of the Notice Issued under Section 263:The assessee challenged the notice issued under section 263 by the Pr. CIT, arguing that it was 'unjustified, arbitrary, excessive, contrary to evidences and bad in law.' However, the Tribunal noted that the assessee's representative did not press this legal ground during the hearing, leading to the dismissal of this ground.2. Jurisdictional Error by Pr. CIT:The assessee contended that the Pr. CIT erred in assuming jurisdiction under section 263, particularly when the assessment order under section 143(3) was neither erroneous nor prejudicial to the interest of Revenue. The Tribunal, however, found that the Pr. CIT had validly invoked section 263 after examining the assessment order and identifying an oversight regarding the applicability of section 14A.3. Consideration of Section 14A Disallowance by the AO:The Pr. CIT noticed that the AO had disallowed a sum of Rs. 5,53,606 towards interest paid on overdraft but failed to apply section 14A correctly. The Tribunal observed that the AO overlooked the applicability of section 14A, which necessitated the Pr. CIT’s intervention. The Pr. CIT recalculated the disallowance under section 14A to Rs. 38,62,424 and directed the AO to modify the assessment order accordingly.4. Opportunity Provided to the Assessee to Present Its Case:The assessee argued that it was not provided sufficient opportunity to present its case with all evidences. The Tribunal acknowledged this contention but noted that the legal grounds were not pressed by the assessee’s representative during the hearing. Consequently, this ground was dismissed.5. Disallowance of Expenditure Towards Interest Paid Under Section 14A:The assessee argued that the Pr. CIT erred in making a disallowance of Rs. 33,08,818 towards interest paid under section 14A. The Tribunal referred to judgments from the Supreme Court and various High Courts, which held that disallowance under section 14A should not exceed the exempt income received. The Tribunal restricted the disallowance to the exempt income of Rs. 1,56,881 received by the assessee during the assessment year, thereby partially allowing the appeal on this ground.6. Prejudicial Impact of the Assessment Order to the Interest of Revenue:The Pr. CIT found the assessment order to be both erroneous and prejudicial to the interest of Revenue, as it did not properly apply section 14A. The Tribunal upheld this view, noting that the AO’s oversight warranted the Pr. CIT’s corrective action under section 263.Conclusion:The Tribunal dismissed the legal grounds raised by the assessee but allowed the alternative plea, restricting the disallowance under section 14A to the amount of exempt income received. The appeals for both assessment years 2013-2014 and 2014-2015 were partly allowed, with the Tribunal's observations for the former applied mutatis mutandis to the latter.Order Pronounced:The order was pronounced in the open court on 11/08/2020.