Tribunal overturns CIT(A) decision on section 14A disallowance, emphasizes actual exempt income for disallowance.

The Tribunal allowed the appeal filed by the assessee, overturning the CIT(A)'s decision to uphold the addition made by the AO under section 14A of the Act. The Tribunal held that only investments generating exempt income should be considered for disallowance under section 14A, in line with a judgment of the Hon'ble Delhi High Court. It emphasized that the disallowance should be based on investments that have actually generated exempt income and deleted the Rs. 4,69,055/- disallowance initially imposed by the AO.

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Issues:
The solitary issue raised is whether CIT(A) is justified in confirming the addition made by the AO amounting to Rs. 4,69,055/- under section 14A of the Act.

Brief facts:
The assessee, a public sector undertaking, filed a return of income for Assessment Year 2014-15, initially declaring total income of Rs. 8,44,17,38,820/-. After scrutiny, a revised return was filed with income declared as Rs. 8,43,74,17,120/-. The AO made an additional disallowance of Rs. 4,69,055/- under section 14A r.w.r. 8D of the Income Tax Rules, 1962, after adjusting voluntary disallowance of Rs. 1,30,000/- by the assessee.

First Appellate Authority:
The CIT(A) upheld the disallowance made by the AO under section 14A of the Act.

Tribunal's Decision:
The assessee appealed before the Tribunal, arguing that only dividend earning investments should be considered in calculating the average investment value under Rule 8D(2)(iii) of the Rules, citing a judgment of the Hon'ble Delhi High Court. The Tribunal agreed with this argument, emphasizing that only investments generating exempt income should be taken into account for disallowance under section 14A. Referring to previous judicial pronouncements, the Tribunal held that the disallowance should be based on investments that have generated exempt income. Additionally, the Tribunal noted that the explanation inserted by Finance Act, 2022, was held to be prospective by the Hon'ble Delhi High Court in a separate case. Consequently, the Tribunal deleted the disallowance made under section 14A of the Act, amounting to Rs. 4,69,055/-, and allowed the appeal filed by the assessee.

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