2025 (7) TMI 1024 - AT - Income Tax

Tax authority must restrict Section 14A disallowance to actual exempt dividend income received

Samir Narain Bhojwani, Mumbai Versus Dy. CIT – 4 (2) (1), Mumbai

The ITAT Mumbai ruled on three issues in this tax appeal. First, regarding disallowance under section 14A read with Rule 8D, the tribunal held that ... Disallowance u/s 14A r.w.r. 8D - assessee earned dividend income on units of mutual funds which was claimed as exempt while filing the return of income - HELD THAT:- We find that it is a settled position that there is no prohibition/restriction/mandate in law that the assessed income cannot be lower than the returned income. We find that in CIT vs. Bhaskar Mitter [1994 (12) TMI 327 - HIGH COURT OF CALCUTTA] held that the law empowers the ITO to assess the income of the assessee according to law and determine the tax payable thereon and thus, the Revenue Authorities cannot say that merely because the assessee has returned a figure which is higher than the value determined in accordance with correct legal principles, such higher amount and not the correct amount should be lawfully assessed. We further find that in Balmukund Acharya [2008 (12) TMI 88 - BOMBAY HIGH COURT] held that if any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that the only legitimate taxes due are collected. We do not find any merit in the objections raised by the learned DR. Accordingly, the AO is directed to restrict the disallowance computed under section 14A r.w. Rule 8D of the Rules to the amount of exempt income, i.e. Rs. 15,40,235/-, earned by the assessee during the year under consideration. As a result, ground no.1 raised in assessee’s appeal is allowed. Disallowance of maintenance expenses incurred by the assessee - HELD THAT:- From the perusal of the orders passed by the lower authorities, we find that the AO, at the outset, dismissed the plea of the assessee by placing reliance upon the decision of the Hon’ble Supreme Court in Goetze India Ltd. [2006 (3) TMI 75 - SUPREME COURT] without going into the merits of the claim. We further find that the learned CIT(A) has rendered certain findings and also discussed some findings of the AO, as noted in the foregoing paragraph. However, we do not find any such finding being rendered by the AO from the perusal of the assessment order. Thus, it is evident that, as regards the claim of deduction of maintenance expenditure by the assessee, there is no factual examination by either of the lower authorities. Therefore, we deem it appropriate to restore this issue to the file of the Jurisdictional AO for de novo adjudication as per law after considering the material/evidence placed on record by the assessee - ground no.2 raised in assessee’s appeal is allowed for statistical purposes. Disallowance of interest on delayed payment of TDS u/s 37(1) - interest paid on delayed payment of TDS arises because the assessee failed to comply with statutory requirements and it is not an expenditure incurred for the primary purpose of conducting business operations - HELD THAT:- Whether the interest under section 201(1A) of the Act paid by the assessee was an expenditure incidental to business and allowed as a deduction from the profits and gains of the business, came up for consideration in CIT vs. Chennai Properties & Investment Ltd. [1998 (4) TMI 89 - MADRAS HIGH COURT] While answering the issue in negative and in favour of the Revenue, the Hon’ble Madras High Court, after considering the decision of Bharat Commerce & Industries Ltd. [1998 (3) TMI 2 - SUPREME COURT] held that an assessee could not possibly claim that it was borrowing from the State the amounts payable by it as income-tax and utilising the same as capitalization in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure. As we do not find any merits in the claim of the assessee in seeking deduction under section 37(1) of the Act in respect of interest on delayed payment of TDS. Accordingly, the impugned order on this issue is upheld, and ground no.3 raised in assessee’s appeal is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the appeal are:Whether the disallowance under section 14A of the Income Tax Act, 1961 ('the Act'), read with Rule 8D of the Income Tax Rules, 1962 ('the Rules'), can be restricted to the amount of exempt income earned by the assessee, specifically dividend income from mutual funds.Whether maintenance expenses amounting to Rs. 1,02,73,260 incurred by the assessee for a property involved in a legal dispute qualify as allowable revenue expenditure under section 37(1) of the Act.Whether interest paid on delayed payment of Tax Deducted at Source (TDS) and Goods and Services Tax (GST) is allowable as a deduction under section 37(1) of the Act.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Disallowance under section 14A of the ActRelevant legal framework and precedents: Section 14A of the Act empowers the Assessing Officer (AO) to disallow expenditure incurred in relation to exempt income. Rule 8D of the Rules provides a mechanism for computing such disallowance. The Supreme Court in Maxopp Investment Ltd. vs. CIT (2018) upheld that disallowance under section 14A should be restricted to the amount of exempt income. The Jurisdictional High Court in Nirved Traders Pvt. Ltd. vs. DCIT held similarly that disallowance cannot exceed exempt income.Court's interpretation and reasoning: The assessee earned exempt dividend income of Rs. 15,40,235 and made a suo motu disallowance of Rs. 1,91,18,144 under section 14A r.w. Rule 8D. The AO and Commissioner of Income Tax (Appeals) [CIT(A)] upheld the higher disallowance. However, the Tribunal found merit in the assessee's plea to restrict disallowance to exempt income, following the Supreme Court and High Court rulings.Key evidence and findings: The assessee's return declared exempt dividend income and computed disallowance under section 14A. The AO did not grant relief, citing Rule 8D application. The Departmental Representative (DR) argued that restricting disallowance to exempt income would result in assessed income being lower than returned income, which they contended is impermissible.Application of law to facts: The Tribunal rejected the DR's argument, citing the Calcutta High Court's ruling in CIT vs. Bhaskar Mitter that the AO must assess income according to law, even if it results in assessed income being lower than returned income. The Tribunal also referenced the Jurisdictional High Court's decision in Balmukund Acharya vs. DCIT emphasizing that tax can only be collected as authorized by law and estoppel cannot be applied against statute.Treatment of competing arguments: The Tribunal carefully considered the DR's submission but found it contrary to settled legal principles. The Tribunal gave precedence to judicial pronouncements that restrict disallowance under section 14A to exempt income.Conclusions: The Tribunal directed the AO to restrict disallowance under section 14A r.w. Rule 8D to Rs. 15,40,235, the amount of exempt income earned by the assessee.Issue 2: Disallowance of maintenance expenses of Rs. 1,02,73,260 (Versova property) under section 37(1)Relevant legal framework and precedents: Section 37(1) allows deduction of any expenditure incurred wholly and exclusively for business purposes, excluding capital or personal expenses. The Supreme Court in Goetze India Ltd. vs. CIT held that expenses related to capital assets or contingent liabilities are not allowable as revenue expenses.Court's interpretation and reasoning: The assessee incurred maintenance expenses for flats allotted to Bombay Slum Redevelopment Corporation Ltd. (BSRCL) under a Development Agreement. Due to a legal dispute, possession was not handed over to BSRCL, and the matter was sub judice. The assessee claimed the expenses as necessary business expenditure to protect its reputation and business interests but disallowed the amount suo motu in the return.Key evidence and findings: The AO disallowed the expenses relying on Goetze India Ltd., classifying them as capital or contingent liabilities linked to a legal dispute. The CIT(A) upheld this disallowance, observing the liability was contingent and not crystallized, and the expenses were not wholly and exclusively for business income generation.Application of law to facts: The Tribunal found no factual examination by the AO or CIT(A) on merits of the claim. The assessee's submissions, including the Development Agreement, arbitration award, and ongoing litigation, were noted. The Tribunal observed the assessee's declaration reserving the right to claim the expenditure at an appropriate time and that the matter was sub judice.Treatment of competing arguments: The Tribunal noted that the AO and CIT(A) relied on the Supreme Court decision but did not examine the facts or evidence submitted by the assessee. The Tribunal found the disallowance premature without factual inquiry.Conclusions: The Tribunal set aside the impugned order on this issue and remanded the matter to the AO for de novo adjudication after considering evidence and affording the assessee a reasonable opportunity of hearing. The ground was allowed for statistical purposes.Issue 3: Disallowance of interest on delayed payment of TDS/GST under section 37(1)Relevant legal framework and precedents: Section 37(1) permits deduction of business expenses but excludes penalties or interest arising from non-compliance with statutory obligations. The Bombay High Court in Ferro Alloys Corporation Ltd. vs. CIT held that interest on delayed payment of TDS is not allowable as business expenditure. The Madras High Court in CIT vs. Chennai Properties & Investment Ltd. held similarly, relying on the Supreme Court's ruling in Bharat Commerce & Industries Ltd. vs. CIT.Court's interpretation and reasoning: The CIT(A) upheld the disallowance, reasoning that interest paid on delayed TDS/GST arises due to failure to comply with statutory provisions and is not incurred for business operations.Key evidence and findings: The assessee claimed deduction of interest paid on delayed TDS/GST. The AO and CIT(A) disallowed the claim relying on judicial precedents.Application of law to facts: The Tribunal found the precedents applicable and consistent in holding that such interest is not an allowable business expenditure under section 37(1).Treatment of competing arguments: The Tribunal noted the assessee's reliance on cases where indirect taxes and compensatory interest were allowed but distinguished those from direct tax interest such as TDS delay interest, which the courts have consistently disallowed.Conclusions: The Tribunal upheld the disallowance of interest on delayed payment of TDS/GST under section 37(1) and dismissed the ground raised by the assessee.3. SIGNIFICANT HOLDINGSOn the restriction of disallowance under section 14A:'The disallowance under section 14A of the Act is to be restricted to the amount of exempt income earned by the assessee during the year under consideration.'The Tribunal emphasized that the AO must assess income according to law and may not insist on assessing income higher than the correct taxable income merely because the assessee declared a higher figure, citing:'An assessee is liable to pay tax only upon such income as can be in law included in his total income and which can be lawfully assessed under the Act... There is no estoppel by conduct against law nor is there any waiver of the legal right as much as the legal liability to be assessed otherwise than according to the mandate of the law.'On maintenance expenses disallowance:'The expenses, although related to the appellant's real estate business, do not qualify as revenue expenses under Section 37(1) because they are linked to a capital asset and a legal dispute. Moreover, the liability has not been ascertained yet and is still contingent.'However, due to lack of factual examination, the matter was remanded for fresh adjudication.On interest on delayed TDS/GST payment:'Interest paid on delayed payment of TDS/GST is not an allowable business expenditure under section 37(1) of the Income-tax Act, 1961.'The Tribunal relied on authoritative High Court and Supreme Court decisions confirming that such interest arises from statutory non-compliance and is not compensatory or incidental to business operations.Final determinations:Disallowance under section 14A r.w. Rule 8D is restricted to exempt income of Rs. 15,40,235.Disallowance of maintenance expenses of Rs. 1,02,73,260 is set aside and remanded for fresh consideration with opportunity for the assessee to present evidence.Disallowance of interest on delayed payment of TDS/GST is upheld and not allowable under section 37(1).