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2021 (3) TMI 931 - AT - Income TaxDisallowance under section 14A - whether the disallowance under section 14A can exceed the exempt income? - Suo moto disallowance made by assessee - HELD THAT:- Assessee, during the impugned assessment year, has indeed earned dividend income to the extent of ₹ 8,550. We find that now it is a well settled principles of law that the disallowance computed under section 14A of the Act r/w rule 8D of the Rules shall not exceed the exempt income earned by the assessee. This principle of law is in conformity with the decision of Cheminvest Ltd.[2015 (9) TMI 238 - DELHI HIGH COURT] wherein it has been held that disallowance of expenditure under section 14A of the Act shall not exceed exempt income earned for the year under consideration. However, in the given case, the assessee has disallowed suo-motu by following the provisions of Rule 8D(2)((iii) i.e., 0.5% on average investment. It is settled law that the administrative expenses of 0.5% under Rule-8D(2)(iii) should be on the investment which earned the exempt income. We direct the AO to calculate the disallowance under rule 8D(2)(iii) as per the above direction and restrict the disallowance to the above amount or exempt income whichever is less. Accordingly, we set aside the impugned order of the learned Commissioner (Appeals) and direct the Assessing Officer to restrict the disallowance computed under section 14A r/w Rule 8D of Rules, as per the above direction. Consequently, the grounds of appeal raised by the assessee are allowed.
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