2017 (2) TMI 1254 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - In the present case the assessee has earned exempt dividend income of Rs. 11058833/- and assessee on its own has disallowed a sum of Rs. 21952010/- in the form of Rs. 678146/- out of interest and Rs. 21273864/- in accordance with the clause (iii) of sub rule 2 of rule 8 D under section 14 A of the income tax act. Recently the Delhi High Court in the case of Joint Investments vs ACIT 2015 (3) TMI 155 - DELHI HIGH COURT held that disallowance under section 14A of the Act must not be made to the extent that it is almost equal to or more than the actual dividend income received by the assessee. As in the present case disallowance under section 14 A read with rule 8D has already exceeded by the suo Moto disallowance made of the assessee amounting to Rs. 21952010/- against the exempt income of Rs. 11058833/- therefore no further disallowance can be imputed. - Decided in favour of assessee.

Summary

Issues:
- Disallowance under section 14 A of the Income Tax Act read with Rule 8D

Analysis:
The appeal was filed by the revenue against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance under section 14 A of the Income Tax Act. The revenue raised three grounds of appeal challenging the deletion of disallowance amounting to a significant sum. The appellant contended that the CIT (A) erred in deleting the disallowance without considering the detailed calculations provided by the Assessing Officer. The appellant argued that the assessee failed to establish the nexus between borrowings, investments, and loans, leading to the incurring of finance costs for financing investments generating exempt income. The provisions of section 14 A read with Rule 8D were highlighted as applicable even if the assessee voluntarily added back direct expenses.

The assessee, a company engaged in share dealing, securities, and financing activities, declared an income of a substantial amount. The company earned dividend income, claimed as exempt, and faced a disallowance under section 14 A read with Rule 8D. The Assessing Officer computed the disallowance based on the average value of investments, leading to a specific amount. The CIT (A) deleted a portion of the disallowance, which was further contested by the revenue in the appeal. The dispute primarily revolved around the interpretation and application of Rule 8D concerning the disallowance under section 14 A of the Income Tax Act.

During the proceedings, the Departmental Representative argued that the provisions of Rule 8D were correctly applied, justifying the balance disallowance made by the Assessing Officer. On the other hand, the Authorized Representative of the assessee maintained that the disallowance already exceeded the exempt income earned, emphasizing that all relevant expenditures had been duly disallowed. The Tribunal carefully reviewed the contentions and lower authorities' orders. It was noted that the assessee had voluntarily disallowed a significant sum against the exempt income. Citing relevant case laws, the Tribunal emphasized that the disallowance should not surpass the actual dividend income received. Given that the disallowance had already exceeded the exempt income due to the assessee's voluntary disallowance, no further disallowance was warranted. Consequently, the Tribunal dismissed all three grounds of appeal raised by the revenue, ultimately upholding the decision of the CIT (A) to delete the disallowance.

In conclusion, the Tribunal dismissed the appeal of the revenue, affirming the deletion of the disallowance under section 14 A of the Income Tax Act read with Rule 8D. The judgment highlighted the importance of considering the actual dividend income received by the assessee while determining the extent of disallowance, emphasizing the application of relevant legal provisions and precedents in tax matters.