Section 14A Disallowance Cannot Be More Than Exempted Income: ITAT

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that section 14A disallowance cannot be more than exempted income.

The bench of G.S. Pannu (President) and Sandeep Singh Karhail (Judicial Member) has directed the AO to restrict the disallowance made under section 14A of the Income Tax Act to the extent of exempt income earned by the assessee.

Section 14A is a disallowance provision. This section provides that while computing the total income of any assessee, no deduction will be permitted in respect of any expense incurred in relation to any income which is exempt from income tax.

The appellant/assessee filed its return of income declaring a total income of Rs.6,83,32,200. During the assessment proceedings, it was observed that the assessee has earned a dividend income, which was claimed as exempt.

It was also observed that the assessee in its profit and loss account has debited an amount of Rs.2,59,55,000 as interest on the loan, forming part of its financial cost.

The assessee in its balance sheet has shown a total investment of Rs.660,23,99,000. The assessee was asked to show cause as to why the disallowance under section 14A should not be made for the exempt income shown. In response thereto, the assessee submitted that it has not made any investment with a view to earning exempt income, and the assessee, as part of its business activity, has acquired a strategic stake in other companies to hold business interest with a view to earning profit.

The assessee submitted that provisions of section 14A of the Income Tax Act are not applicable because no investment was made with a view to earning exempt income.

The AO did not agree with the submissions of the assessee and computed the disallowance of Rs.2,59,40,898 under section 14A read with Rule 8D. The CIT(A) dismissed the appeal filed by the assessee.

The assessee contended that the disallowance under section 14A of the Income Tax Act cannot exceed the quantum of exempt income.

The tribunal allowed the appeal of the assessee and relied on the decision of the Bombay High Court in the case of Nirved Traders (P.) Ltd. v/s Dy. CIT in which it was held that disallowance under section 14A cannot be more than exempt income.

Case Title: Royal Twinkle Star Club Pvt. Ltd. Versus Dy. Commissioner of Income Tax

Case No.: ITA no.1425/Mum./2018

Date: 11/05/2023

Counsel For Petitioner: Hiro Rai

Counsel For Respondent: Riddhi Mishra

Click Here To Read The Order