Disallowance under section 14A of the Act cannot exceed the exempt income earned by the assesse: ITAT follows Delhi HC decision

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The Income Tax Appellate Tribunal Delhi bench, comprising of judicial member SH.Amit Sukla and accountant member SH.O.P.Kant held that disallowance under section 14A of the act cannot exceed the amount of exempted income earned by the assessee.

The appeal was filed against the order passed by the Commissioner of Income-tax (Appeals)  New Delhi for assessment year 2010-11.They argued that CIT has erred both in law and facts in making a disallowance u/s 14A by invoking the provisions of Rule 8D although on facts, there was no case for applying said Rule, also made an incorrect presumption that Appellant invested in mutual  funds during the year, without considering the facts on record that assessee has made no such investment and CIT  has erred both in law and facts in making disallowance under Rule 8D amounting to Rs. 14,01,058/- which has exceeded the exempt income of Rs. 6,62,660/-

The case between frozen food stuff exporter and ACIT was in connection with the disallowance under section 14A of the Act invoking Rule 8D of the Rules. When assesse had filed their income tax return, AO was not satisfied with the claim of Rs.6, 021/- made by the assessee under section 14A of the Act. Therefore he invoked Rule 8D of the Income Tax Rules, 1962 and computed disallowance of Rs.14, 01,057/-. After considering the disallowance of Rs.6, 021/-made by the assessee, the Assessing Officer made addition of Rs.13, 95,036/-. The first appellate authority confirmed the addition made by AO.

Assessee challenged the order before the ITAT contending that the AO not recorded the dissatisfaction regarding the claim of aforesaid amount and further submitted that the satisfaction recorded by AO based on wrong facts and also added that they didn’t made any MF investment during the assessment period. The assesses arguments based on the HC decision regarding the disallowance under section 14A of the Act cannot exceed the exempt income earned by the assessee.

On the other side, the Revenue relied on the order of the lower authorities and the Assessing Officer has recorded his dissatisfaction in the impugned assessment order regarding the MF investment, section 14A doesn’t allow any deduction in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act. Accordingly the ITAT rejected the contention of the council that no dissatisfaction was recorded by Assessing Officer finding the same as incorrect.

The bench agree with the contention that disallowance under section 14A of the Act of the assessee cannot exceed the exempt income earned by the assessee during the year under consideration.

The appeal of the assessee allowed partly by following the decision of the High Court in the case of Cheminvest Ltd (supra), ITAT  restrict the disallowance under section 14A of the Act to Rs.6,62,660/-.

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