2019 (11) TMI 141

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....assessee is with regard to disallowance of expenses incurred in earning income which does not form part of total income under Chapter III of the Income-Tax Act, 1961 ["the Act"] by invoking the provisions of section 14A of the Act. 3. The assessee is a company engaged in the business of financing as well as investment in shares and securities. For the AY 2013-14, the assessee filed a return of income on 21.9.2013 declaring income of Rs. 3,75,18,920. 4. In arriving at the total income, the assessee had made a disallowance of Rs. 24,88,20,868 u/s. 14A of the Act. The AO after making a reference to the provisions of section 14A of the Act and Rule 8D of the Income-tax Rules, worked out the disallowance u/s. 14A of the Act as follows:- ....

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....f Average Investments 5,09,02,072             Total Disallowance U/s 14A   27,09,88,037 5. The difference between the disallowance made by the AO and the disallowance made by the assessee in the computation of income viz., a sum of Rs. 2,21,67,169 was added to the total income of the assessee by way of disallowance u/s.14A of the Act. On appeal by the assessee, the CIT(Appeals) restricted the addition u/s. 14A of the Act of Rs. 24,90,96,229 as against the disallowance u/s. 14A made by the AO of Rs. 27,09,88,037. Still aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. Though the assessee has raised several grounds of a....

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..... We find that the Hon'ble Delhi High Court in the case of Principal CIT vs. Caraf Builders & Constructions (P.) Ltd. (101 taxman.com 167) has dealt on this issue. The Headnote reads as under: "Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not included in total income (Rule 8D) - Assessment year 2009-10 - Whether upper disallowance cannot exceed exempt income of relevant year - Held, yes - Whether where for year in question, finding of fact was that assessee had not earned any tax free income, corresponding expenditure could not be worked out for disallowance - Held, yes - Whether for computing disallowance under clause (ii) of rule 8D(2), numer....

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....dingly, we hold that the disallowance cannot exceed the amount of exempt income. On the second limb of argument that only investments which yielded exempt income should alone be considered, in the light of the decision of the Special Bench of Tribunal in the case of ACIT vs. Vireet investment Pvt. Ltd. & anr (165 ITD 27) (SB), the contention of the assessee is accepted. Accordingly, we restore the issue back to the file of the AO for disallowance u/s 14A by restricting the amount of disallowance to the lower of exempt income or amount arrived at by prescribed formula under rule 8D clause (iii) by taking into only those investments which yielded exempt income." By applying the ratio of the above decisions, we restore the disputed is....