2024 (12) TMI 1381 - AT - Income Tax

Disallowance under Section 14A limited to actual dividend income received, cannot exceed exempt income amount

ITAT Kolkata allowed the appellant's appeal regarding disallowance under section 14A. The appellant had received dividend income and made suo moto ... Disallowance u/s 14A - appellant had received dividend income and made suo moto disallowance - HELD THAT:- Disallowance made by the assessee as even the strategic investments have to be considered while computing the disallowance under Rule 8D r.w.s. 14A of the Act. In view of the decision of State Bank of Patiala [2018 (11) TMI 1565 - SC ORDER] the disallowance u/s 14A has to be restricted to Rs. 3,75,000/- which was the amount of dividend received by the assessee. The contention of the CIT(A) that it was an isolated case and the facts are not identical to the facts of the case of the assessee does not appear to be correct as in that case Hon’ble Supreme Court had dismissed the Special Leave Petition both on the ground of delay as well as on merits and the order of the Hon’ble Punjab and Haryana High Court which upheld the order of the Tribunal that amount of disallowance u/s 14A could be restricted to amount of exempt income only and not a higher figure was thereby confirmed and the decision of the Hon’ble Supreme Court is binding on the High Court as well as the Tribunal. Appeal of assessee allowed. Issues Involved:1. Whether the ex-parte order passed by the Commissioner of Income Tax (Appeals) without providing a reasonable opportunity of hearing to the appellant violated the principles of natural justice.2. Whether the disallowance of Rs. 14,94,650 under Section 14A of the Income Tax Act was justified.3. Whether the disallowance under Section 14A should be restricted to the amount of exempt income earned by the assessee.Detailed Analysis:Issue 1: Ex-parte Order and Principles of Natural JusticeThe appellant argued that the Commissioner of Income Tax (Appeals) erred in passing an ex-parte order without providing a reasonable opportunity to be heard, which is against the principles of natural justice. The appellant was precluded from representing its case due to ongoing post-search proceedings. The Tribunal noted that the appellant's counsel contended that the order was confirmed without affording a reasonable opportunity for hearing. However, this ground was not pressed during the hearing and was dismissed as 'not pressed'.Issue 2: Justification of Disallowance under Section 14AThe appellant challenged the disallowance of Rs. 14,94,650 made by the Assessing Officer under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The Assessing Officer noted that the appellant had received dividend income of Rs. 3,75,000 and made suo moto disallowance of Rs. 5,350. However, the AO found this unsatisfactory as the appellant did not disallow direct expenses related to exempt income nor considered 1% of the annual average of the monthly averages of the opening and closing balance of the investment. The AO calculated the disallowance based on the investment in Lux Industries Ltd., which yielded exempt income, leading to a disallowance of Rs. 14,94,650 after excluding the suo moto disallowance. The CIT(A) upheld this disallowance, referencing the Supreme Court's decision in 'Maxopp Investment Ltd. vs. CIT', which clarified that expenditure related to exempt income must be disallowed.Issue 3: Restriction of Disallowance to Exempt IncomeThe Tribunal considered whether the disallowance under Section 14A should be restricted to the amount of exempt income earned by the assessee. The appellant cited several judicial pronouncements, including the Supreme Court's decision in 'Pr. CIT v. State Bank of Patiala', which held that disallowance under Section 14A should not exceed the exempt income earned. The Tribunal agreed with the appellant, stating that the disallowance should be limited to Rs. 3,75,000, the amount of dividend received. The Tribunal found the CIT(A)'s view that the 'State Bank of Patiala' case was isolated and non-identical to be incorrect, as the Supreme Court's decision is binding. Consequently, the Tribunal directed the AO to restrict the disallowance to Rs. 3,75,000.Conclusion:The Tribunal allowed the appeal, directing the Assessing Officer to restrict the disallowance under Section 14A to the amount of exempt income, Rs. 3,75,000, instead of the initially disallowed Rs. 14,94,650. The Tribunal's decision emphasized adherence to the principle that disallowance should not exceed the exempt income earned, aligning with the Supreme Court's precedent.