2023 (4) TMI 944 - AT - Income Tax

Tribunal limits disallowance under section 14A to self-disallowed amount, rules disallowance cannot exceed exempt income

The Tribunal upheld the decision of the Ld. CIT(A) in restricting the disallowance under section 14A read with Rule 8D to the amount self-disallowed by ... Disallowance u/s. 14A r.w.r. 8D - suo motto disallowance made by the assessee - HELD THAT:- It is settled proposition of law that disallowance under section 14A read with Rule 8D cannot be more than the exempt income earned by the assessee. In the instant case the assessee has suo-moto disallowed an amount u/s 14A r.w.r. 8D which is more than the dividend income earned by the assessee. This issue has successfully been decided by cases of HSBC Invest Direct (India) Ltd. [2019 (2) TMI 731 - BOMBAY HIGH COURT] and Nirved Traders Pvt Ltd [2019 (4) TMI 1738 - BOMBAY HIGH COURT], Oil Industry Development Board [2019 (3) TMI 1571 - SC ORDER] and State Bank of India [2018 (11) TMI 1565 - SC ORDER] that disallowance u/s 14A should be restricted to amount of exempt income of assessee only and not a higher income. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D can exceed the amount of exempt income earned by the assessee in the relevant assessment year. 2. Whether the Assessing Officer's suo motu computation of disallowance under section 14A read with Rule 8D (far in excess of exempt dividend income) is sustainable where the assessee has made a suo motu disallowance in its return. 3. Whether reliance on departmental decisions and CBDT circulars can justify a disallowance under section 14A read with Rule 8D exceeding exempt income where higher judicial authority decisions restrict such disallowance. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework The statutory provision under consideration is section 14A of the Income-tax Act with the computation mechanism provided by Rule 8D; these permit disallowance of expenditure in relation to exempt income. The principle at issue is the permissible upper limit of such disallowance vis-à-vis the exempt income actually earned in the year. Issue 1 - Precedent Treatment (followed/distinguished/overruled) The Court follows a consistent line of precedent from High Courts and the Supreme Court holding that disallowance under section 14A cannot exceed the amount of exempt income. Several rulings of higher courts and coordinate tribunals are treated as authoritative and followed in the present matter. Issue 1 - Interpretation and reasoning The Tribunal reasons that where exempt dividend income for the year is quantifiable and limited (here, dividends of Rs.7,29,565), any disallowance under section 14A/rule 8D that exceeds that exempt income lacks permissible basis. The AO's far greater disallowance (aggregate in crores) is inconsistent with the settled legal position that expenditure disallowable as attributable to exempt income cannot exceed that exempt income in amount; hence the AO's computation is excessive. Issue 1 - Ratio vs. Obiter Ratio: Disallowance under section 14A read with Rule 8D must be limited to the amount of exempt income earned in the relevant year; any higher disallowance is unsustainable. The Tribunal's application of this principle to reduce the AO's disallowance is binding on the facts of this case. Observations reiterating precedent and referring to coordinate decisions are explanatory (obiter) insofar as they reinforce the ratio. Issue 1 - Conclusions The Tribunal confirms the limitation: disallowance under section 14A/rule 8D is restricted to the amount of exempt income (here, the assessee's suo motu disallowance of Rs.9,60,000, itself exceeding the dividend actually earned, is accepted and excess AO disallowance is deleted to that extent). Issue 2 - Legal framework Principles governing assessment adjustments where the assessee makes a suo motu disallowance in the return and where the AO makes suo motu additions under section 14A/rule 8D. The question concerns the interplay between the assessee's return position and the AO's independent computation when both concern the same statutory disallowance. Issue 2 - Precedent Treatment (followed/distinguished/overruled) The Tribunal follows precedents that permit acceptance of a reasonable suo motu disallowance by the assessee and restrict AO's further disallowance when it would exceed the exempt income, citing multiple Tribunals and High Court/Supreme Court decisions that have applied this limitation. Issue 2 - Interpretation and reasoning The Tribunal notes the assessee had itself made a suo motu disallowance of Rs.9,60,000 in the return. Given the statutory cap derived from precedent (that disallowance cannot exceed exempt income), the AO's additional disallowance of a substantially larger amount is neither justified nor permissible. The Tribunal treats the assessee's suo motu disallowance as the operative figure to be sustained (subject to the overall constraint of exempt income). Issue 2 - Ratio vs. Obiter Ratio: Where an assessee makes a suo motu disallowance and the exempt income is limited, an AO's further disallowance that would cause total disallowance to exceed the exempt income is not sustainable. Observations about the adequacy or methodology of the assessee's computation beyond this limiting principle are obiter. Issue 2 - Conclusions The Tribunal confirmed the assessee's suo motu disallowance of Rs.9,60,000 and allowed deletion of the remainder of the AO's disallowance; the AO's additional disallowance was set aside as exceeding the permissible limit tied to exempt income. Issue 3 - Legal framework Role and weight of departmental circulars or coordinate tribunal orders versus binding decisions of High Courts and the Supreme Court in determining the scope of disallowance under section 14A/rule 8D. Issue 3 - Precedent Treatment (followed/distinguished/overruled) The Tribunal distinguishes reliance on a co-ordinate Bench order and administrative circulars where such authorities conflict with binding pronouncements of higher judicial forums. Higher judicial authority decisions that establish the limiting principle (disallowance cannot exceed exempt income) are given precedence and followed. Issue 3 - Interpretation and reasoning The Tribunal observes that departmental circulars or coordinate decisions cannot override binding precedents of High Courts or the Supreme Court. When higher court rulings mandate that disallowance be restricted to exempt income, the AO's methodology or larger disallowance justified by other orders/circulars cannot be sustained. Thus, the Court gives primacy to superior judicial pronouncements in resolving the conflict. Issue 3 - Ratio vs. Obiter Ratio: Binding decisions of High Courts and the Supreme Court that limit section 14A/rule 8D disallowance to the amount of exempt income take precedence over contrary administrative instructions or co-ordinate tribunal orders. Statements addressing the non-binding nature of specific circulars or decisions are explanatory. Issue 3 - Conclusions The Tribunal rejected the Revenue's reliance on the AO's order and a co-ordinate Bench decision/administrative circular to sustain a disallowance exceeding exempt income, applying superior court authority to restrict the disallowance to the assessee's suo motu figure (subject to the exempt-income cap). Cross-reference Issues 1-3 are interrelated: the primary legal constraint (issue 1) drives the outcome on the AO's additional disallowance (issue 2) and determines the appropriate weight to be accorded to departmental or coordinate decisions (issue 3). The Tribunal's conclusions flow from applying the limiting principle established by higher judicial authority.