2021 (10) TMI 823 - AT - Income Tax

Tribunal limits disallowance to exempt income under Section 14A with Rule 8D.

The tribunal held that disallowance under Section 14A with Rule 8D should be limited to the exempt income received during the year. The tribunal dismissed ... Disallowance u/s 14A r.w Rule 8D - profit earned by an assessee from a partnership concern - HELD THAT:- Expenditure incurred for earning of share of profit in a partnership firm, being exempt u/s 10(2A) of the Act, would be liable for disallowance u/s 14A - In fact, we find that a similar view had been taken in the case of Shri Vishnu Anant Mahajan [2012 (6) TMI 297 - ITAT, AHMEDABAD] - as observed by the Tribunal that the provisions of Sec. 14A applies to the share of profit earned by an assessee from the partnership firm. Also, the ITAT, Mumbai in the case of Minal Industries Ltd. [2019 (9) TMI 759 - ITAT MUMBAI] following the view taken by the “Special bench” of the ITAT, Ahmedabad in the case of Shri. Vishnu Anant Mahajan [2012 (6) TMI 297 - ITAT, AHMEDABAD] had concluded, that the claim of the assessee that the provisions of Sec. 14A would not be applicable to the share of profit earned by the assessee from a partnership firm does not merit acceptance. Accordingly, in the backdrop of our aforesaid observations, we herein conclude that the claim of the ld. A.R that no disallowance u/s 14A could be made qua the profit earned by an assessee from a partnership concern cannot be accepted and is accordingly rejected. AO without recoding his objective satisfaction had wrongly assumed jurisdiction and dislodged the disallowance that was on a suo motto basis offered by the assessee u/s 14A - A.O had given cogent reason as to why the disallowance offered by the assessee u/s 14A was not to be accepted, therefore, we do not find any merit in the claim of the ld. A.R that there was a failure on the part of the A.O to record an objective satisfaction that as to why the disallowance offered by the assessee was not to be accepted. Accordingly, not finding favour with the aforesaid contention of the assessee, we reject the same. Disallowance u/s 14A r.w.Rule 8D(2)(iii) was liable to be restricted only qua the investments that had yielded exempt income to the assessee during the year under consideration - HELD THAT:- We find no infirmity in the view taken by the CIT(A) that the disallowance u/s 14A cannot exceed the amount of the exempt income received by the assessee during the year under consideration. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962.2. Disallowance of Staff Welfare expenses.3. Disallowance of Entertainment expenses.4. Disallowance of Miscellaneous expenses.5. Applicability of Section 14A in the absence of exempt income.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962:The primary issue revolved around the disallowance of Rs. 45,80,000 under Section 14A read with Rule 8D. The assessee argued that the share of profit received from a partnership firm is not exempt from tax as it retains the character of income already subjected to tax. However, the CIT(A) upheld the disallowance but restricted it to the amount of exempt income received, i.e., Rs. 45.80 lakhs, against the AO's computation of Rs. 2,42,74,948. The tribunal agreed with the CIT(A) that disallowance under Section 14A cannot exceed the exempt income received during the year, citing various judicial pronouncements to support this view.2. Disallowance of Staff Welfare expenses:The assessee contested the disallowance of Rs. 1,00,000 out of Rs. 2,50,000 under the head Staff Welfare expenses. The CIT(A) upheld the AO's decision, stating that these expenses were not incurred wholly and exclusively for business purposes. However, the assessee did not press this ground during the hearing, and thus, it was dismissed as not pressed.3. Disallowance of Entertainment expenses:Similarly, the disallowance of Rs. 25,000 out of Rs. 50,000 under the head Entertainment Expenses was contested. The CIT(A) upheld the AO's decision, and like the Staff Welfare expenses, this ground was also not pressed by the assessee during the hearing and was dismissed.4. Disallowance of Miscellaneous expenses:The disallowance of Rs. 50,000 out of Rs. 1,00,000 under the head Miscellaneous Expenditure was also contested. The CIT(A) upheld the AO's decision, and this ground was not pressed by the assessee during the hearing and was dismissed.5. Applicability of Section 14A in the absence of exempt income:The revenue challenged the CIT(A)'s decision to restrict the disallowance under Section 14A to the amount of exempt income received. The revenue argued that the provisions of Section 14A should apply irrespective of whether exempt income was earned during the year. The tribunal, however, upheld the CIT(A)'s decision, stating that disallowance under Section 14A cannot exceed the exempt income received, citing judicial precedents to support this view.Conclusion:The tribunal concluded that the disallowance under Section 14A read with Rule 8D should be restricted to the amount of exempt income received during the year. The tribunal dismissed the grounds related to Staff Welfare, Entertainment, and Miscellaneous expenses as not pressed. The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was dismissed. The tribunal's decision was pronounced in the open court on 07.09.2021.