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Delhi Income ITAT in a recent judgment dealing with the issue of disallowance u/s 14A of the Income Tax Act, 1961 read with Rule 8D has opined that the decision of Delhi High Court in the case of Maxopp Investments is very much relevant on the issue of working of disallowance u/s.14A r.w.Rule 8D.

It is to be noted that in the Maxopp case, the Delhi High Court has laid down broad guidelines regarding the applicability of section 14A and Rule 8D. In the Maxopp case oe of the question before the Court was whether expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A of the Income tax Act, 1961 inasmuch as the dividend received on such shares does not form part of the total income? The court answered the question in affirmative.

It is to be noted that in maxopp (supra) the assessing officer, had apportioned the interest expenditure in the ratio of investment in shares on which dividend was received, to the principal amount of unsecured loans, which worked out to Rs. 67,74,175/-. However, the assessing officer restricted the disallowance under section 14A of the said act to Rs. 49,90,860/-, being the amount of dividend received.

Also Delhi High Court in the case of Joint Investment Pvt Limited has categorically ruled that disallowance under section 14A of the Income Tax Act, 1961 can not exceed the amount of tax exempt income.

In the instant case of DCM Engineering, issue before ITAT was quite similar to maxoop. The brief details of the case are as under:

I.T.A .No. 1333/Del/2012
AY: 2008-09
DCM Engineering Ltd (Appellant) vs ACIT (Respondent)
Date of Order: 01-09-2015

Facts of the case:
The return of the appellant company was selected for scrutiny u/s.143(2). During the year under consideration the assessee had claimed exempt income of Rs.9,01,250/-, being dividend received the shares of SRF Ltd., during the year. The assessee offered Rs.2,00,000/- u/s.14A, during the course of the assessment proceedings on the ground that the amount represents 50% of salary of the concerned executive, who looks after the activities relating to investments. However The Assessing officer (AO) added an amount of Rs. 26,40,830/- u/s 14A on account of expenditure related to earning exempt income. On appeal CIT(A) upheld the addition on the ground that the assessee had kept all the funds in a common account and investments and expenditure were made from the same account and there is no evidence to show that these investments were made from the profit earned by the company.

Held
Assessment set aside and the issue remanded back to the file of A.O to decide the disallowance of expenses u/s.14A r.w. Rule 8D on the investments of shares in question as per the law, keeping in view the guidelines provided for the same in the case of Maxopp (supra)

Excerpts from ITAT Order:
On the facts and circumstances of the present case, the Ld.CIT(A) held that investment would have been made out of common/mixed funds, and therefore the ld. AO has worked out the disallowance at Rs. 26,40,830/- on a proportionate basis with reference to investment of Rs.166.50lacz out of total interest of Rs.576.40 lacs paid on account of cash credits. The ld. CIT(A) should have passed a speaking order dealing with contentions of parties in specific terms with facts and figure. The decision of Hon’’ble Delhi High Court in the case of Maxopp Investments, reported in 374 ITR 272, are very much relevant on the issue of working of disallowance u/s.14A r.w.Rule 8 D by the ld. A.O.

9. We thus following the decision of the coordinate bench in assessee’s own case for assessment year 2009-10(supra), set aside the issue back to the file of A.O to decide the disallowance of expenses u/s.14A r.w. Rule 8 D on the investments of shares in question as per the law, keeping in view the guidelines provided for the same in the case of Maxopp (supra), after affording opportunity of being herd to the assessee.

Download Full Judgment Click Here >>

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

ITAT-The decision of Delhi High Court in Maxopp Investments, is very much relevant on the issue of working of disallowance u/s.14A read with Rule 8D | 02-09-2015 |