Disallowance under Section 14A cannot consume entire administrative expenses for earning taxable income

The ITAT Surat partly allowed the assessee's appeal regarding disallowance under section 14A read with Rule 8D. The AO had disallowed Rs. 2.70 crore against total administrative expenses of Rs. 79.58 lakhs on turnover of Rs. 127.39 crore. The ITAT held that disallowance under section 14A cannot consume entire administrative expenses incurred for earning taxable income. The tribunal directed that 1% of dividend income, direct expenses, and 25% of director's remuneration would suffice for disallowance purposes. Regarding section 80G deduction, the ITAT upheld CIT(A)'s decision allowing 50% deduction on donations to registered trusts, finding the order based on proper verification of facts.

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Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 80G of the Income Tax Act.

Summary:

Issue 1: Disallowance under Section 14A

These appeals by the Revenue challenge the deletion of disallowance under Section 14A for AY 2017-18 and 2018-19. The Revenue contends that the assessee did not furnish details of expenses incurred for earning exempt income and did not make disallowance under Section 14A in the original or revised return. The Assessing Officer (AO) noted that the assessee earned exempt income aggregating Rs. 68.45 crore but only disallowed Rs. 4,59,140/- in the revised computation. The AO issued a show-cause notice and subsequently made a disallowance of Rs. 2.70 crore under Section 14A by invoking Rule 8D.

The CIT(A) deleted the disallowance, relying on the assessee's own case for earlier years and the decision of the jurisdictional High Court in PCIT vs. Sintex Industries Ltd. The CIT(A) found that the assessee had sufficient interest-free funds and had already disallowed 1% of the dividend income and direct expenses. The Tribunal held that the AO did not objectively satisfy the requirements of Section 14A and that the assessee had provided detailed bifurcation of expenses related to exempt income. The Tribunal directed a total disallowance of Rs. 25,17,090/- for AY 2018-19 and Rs. 13,39,559/- for AY 2017-18, including 25% of the director's remuneration.

Issue 2: Disallowance under Section 80G

The AO disallowed Rs. 39,75,000/- for AY 2018-19 due to the absence of 80G certificates for donations made to certain trusts. The CIT(A) allowed relief of Rs. 6,75,000/-, accepting the receipts containing the registration details under Section 80G. The Tribunal upheld the CIT(A)'s decision, verifying that the registration certificates were submitted during the appellate stage and that the CIT(A)'s order was based on factual verification.

Conclusion:

The Tribunal partly allowed the Revenue's appeals for both AY 2017-18 and 2018-19, modifying the disallowance under Section 14A but upholding the CIT(A)'s decision on the disallowance under Section 80G.

Order pronounced on 20/11/2023 in the open court.

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