Disallowance u/s 14A read with Rule 8D beyond scope of rectification u/s 154 – ITAT

Disallowance u/s 14A read with Rule 8D beyond scope of rectification u/s 154 as the issue relating to applicability of section 14A is debatable – ITAT

Disallowance u/s 14A

ABCAUS Case Law Citation:
ABCAUS 2055 (2017) (08) ITAT

The Grievance:
The appeal filed by the assessee was directed against the order of CIT (Appeals) whereby he confirmed the disallowance made by the AO under section 14A of the Act read with rule 8D by way of rectification order passed u/s 154. 

Assessment Year :  2009-10

Brief Facts of the Case:

The assessee was an individual who filed his return of income declaring a total income of Rs. 10,46,950/-. In the assessment completed under section 143(3), the total income of the assessee was determined by the AO at Rs. 10,67,680/-.

Thereafter, it was noticed by the AO from the record that the assessee had earned a substantial tax free income in the form of dividend interest and Long Term Capital Gain, but no disallowance under section 14A was made in the assessment completed under section 143(3) in respect of expenditure incurred in relation to the said exempt income.

According to the AO, there was thus a mistake in the assessment order passed under section 143(3) and the same was rectified by him vide an order passed u/s 154 making disallowance of Rs. 1,21,489/- u/s 14A as worked out by applying rule 8D.

Against the order passed by the AO u/s 154, an appeal was preferred by the assessee before the CIT (A) challenging the disallowance made by the AO u/s 14A read with rule 8D. During the course of appellate proceedings before the CIT (A), it was submitted by the assessee that no expenditure was incurred by him in relation to the exempt income during the year under consideration. It was submitted that the relevant investment which yielded exempt income was entirely made by the assessee out of his own funds and the overdraft amount on which interest had been paid was used to advance money on higher rate of interest.

It was also submitted by the assessee that there was no direct expenditure incurred in relation to the exempt income and even the DEMAT charges were not claimed as deduction in the computation of his income by the assessee.

It was contended that there was thus no expenditure incurred either directly or indirectly in relation to the earning of exempt income and the provisions of Rule 14A as well as rule 8D were not applicable in his case.

The submission made by the assessee did not find favour with the CIT(A) and he confirmed the disallowance made by the AO.

Contention of the appellant petitioner:

The main contention raised by the assessee was that for the issue relating to the disallowance u/s 14A r.w.r. 8D was a highly debatable issue and the same was beyond the scope of rectification permissible u/s 154.

Contentions of the Respondent Revenue:

On the other hand the Revenue contended that the assessee having earned substantial exempt income during the year under consideration, the provisions of section 14A were clearly attracted. It was contended that the issue relating to applicability of section 14A in the case of the assessee thus was not debatable and since there was a mistake on the part of the AO in the order passed u/s 143(3) in not making disallowance on account of expenditure incurred in relation to the exempt income by applying the provisions of section 14A, the rectification as made by the AO was well within the scope of section 154.

Observations made by the Tribunal:

The ITAT opined that the issue relating to the disallowance u/s 14A r.w.r. 8D involves applicability of the said provision as well as computation of disallowance to be made by applying the said provision.

These two parts being inseparable, they cannot be seen in isolation and even if one of these two parts is debatable, the entire issue relating to the disallowance u/s 14A becomes debatable.

The ITAT observed that therefore, even if the issue relating to applicability of section 14A in the case of the assessee was not debatable as contended by the Revenue, the computation of the disallowance by applying the said provision in the facts and circumstances of the assessee’s case was a debatable issue as rightly contended by the assessee and as further evident from the submission made on behalf of the assessee before the CIT (A).

The Tribunal found merit in the contention that the issue relating to the disallowance u/s 14A r.w.r. 8D in the facts and circumstances of the assessee’s case was a debatable issue and the same was beyond the scope of section 154.

Held:
The ITAT deleted the disallowance made by the AO u/s 14A and confirmed by the CIT(A) and allowed the appeal filed by the assessee.

Disallowance u/s 14A

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