Disallowance cannot Exceed Exempt Income: ITAT upholds Deletion of Disallowance u/s 14A of Income Tax Act [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has upheld the deletion of disallowance under Section 14A of the Income Tax Act holding that the disallowance could not exceed the exempt income.

The assessee-company, Dhani Services Ltd was a stock broker of National Stock Exchange and Bombay Stock Exchange.  The first issue related to disallowance made under Section 14A of the Income Tax Act. The assessee had earned exempt dividend income of Rs.18,20,000/-. However, the assessee disallowed a sum of Rs.100/- only under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

The Assessing Officer, however, computed the disallowance as per Rule 8D of income Tax Rules at Rs.7,34,68,829/- and accordingly disallowed the balance amount of Rs.7,34,68,729/.The Commissioner of Income Tax Appeals CIT(A) gave the following directions on this issue: -

 i) for computing average value of investments, only those investments that have yielded exempt income have to be considered; and,

ii) disallowance cannot exceed the amount of exempt income.

The CIT(A) relied upon the decision of the Special Bench of ITAT Delhi in the case of ACIT vs Vireet Investments Pvt. Ltd.. With regard to the second proposition, the CIT(A) followed the decision rendered by the Bombay High Court in the case of Nirved Traders Pvt. Ltd.

K. Gopal appeared on behalf of the assessee and Sanyogita Nagpal appeared on behalf of the revenue.

The two-member Bench of B.R. Baskaran (Accountant Member) and Narender Kumar Choudhry (Judicial Member) noticed that the CIT(A) had followed the decision rendered by the Special Bench in the case of Vireet Investments Pvt. Ltd to hold that only those investments which have yielded exempt income should be considered for computing the average value of investments for the purpose of Rule 8D of the Income Tax Rules.

Further, the CIT(A) had followed the binding decision rendered by the Jurisdictional Bombay High Court in the case of Nirved Traders Pvt. Ltd wherein it was held that the disallowance could not exceed the exempt income. Since the CIT(A) had followed the decision rendered by the Special Bench of ITAT and the Jurisdictional High Court in adjudicating this issue, the Bench found no reason to interfere with the decision so rendered by the CIT(A) on this issue.

The Bench dismissed the appeal filed by the revenue.

To Read the full text of the Order CLICK HERE

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