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Delhi High Court has ruled that the disallowance under section 14A of the Income Tax Act, 1961 can not exceed the amount of tax exempt income

Case Details:
ITA-117/2015
Joint Investments Pvt Ltd (Appellant) vs Commissioner of Income Tax (Respondent)
Date of Order: 25-02-2015

Case Law referred:
Commissioner of Income Tax VI v. Taikisha Engineering India Ltd., (ITA 115/2014

Facts of the Case:
The assessee was engaged in diverse investment activities and in the course of its business derives income from rent, sale of investments, dividend and interest. For AY 2009-10, the appellant assessee had declared Rs. 4890000/- as tax exempt income in the form of dividend. The assessee volunteered Rs. 2,97,440/- as attributable under Section 14A for the purpose of disallowance. The Assessing Officer (AO) on the basis of his own understanding of Rule 8D of the Income Tax Rules disallowed the sum of Rs. 52,56,197/- under Section 14A read with Rule 8D.  The assessee’s grievance was that the entire tax exempt income of Rs. 48,90,000/- was lower than the disallowance. It, therefore, appealed to the CIT (A) but met with no success. Its further appeal to the ITAT likewise met the same fate.

Held:
The High Court set aside the order of the AO on the following grounds as narrated in the judgment:

“In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing Rs. 2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs. 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”

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Related Updates:
Delhi HC Judgment in Maxopp Investments Click Here >>
CBDT Circular 05/2014- Disallowance u/s 14A when exempt income not earned in FY  Click Here >>

Delhi High Court-Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961 can not exceed the amount of Tax Exempt Income. | 02-09-2015 |