The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that disallowance under Section 14 A of the Income Tax Act, cannot exceed exempt income. Thus disallowance under Section 14 A restricted to the extent of exempt income.
The assessee, Mundra International Container Terminal earned a dividend income of ₹25, 32,679, which is exempt from tax. However, the assessee did not allocate any expenditure to earn this exempt income. Consequently, the Assessing Officer (AO) invoked Section 14A of the Income Tax Act and disallowed ₹35,00,000 as per Rule 8D. The assessee contended that no expenditure was incurred to earn the exempt income and, therefore, the disallowance under Section 14A was unwarranted. The assessee further argued that the peak investment in mutual funds was approximately ₹137 crores, with sufficient interest-free funds amounting to ₹284.85 crores. Additionally, the total investment as of March 31, 2015, was ₹70 crores, against which interest-free funds in the form of equity and reserves amounted to ₹414 crores. Hence, the assessee argued that no disallowance under Section 14A was necessary.
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The assessee also argued that since the exempt income was received from mutual funds with no opening and closing balance, 0.5% of the investment would be NIL. Notably, the assessee, without prejudice, suo-moto made a disallowance of ₹35,00,000 under Section 14A, despite the exempt income being only ₹25,32,679. Nevertheless, the AO confirmed the disallowance of ₹35, 00,000 invoking Rule 8D.
The two-member bench of the Tribunal, comprising Accountant Member Annapurna Gupta and Judicial Member T. R. Senthil Kumar, observed that the assessee earned a dividend income of ₹25, 32,679, which is exempt from tax. The AO’s disallowance of ₹35, 00,000 under Rule 8D was noted. On appeal, the CIT (A) restricted the disallowance to the extent of the dividend income earned by the assessee.
The Tribunal noted that this issue has been settled by the Supreme Court in the case of Max Opp Investment Limited, which upheld the Punjab & Haryana High Court’s decision in CIT vs. Hero Cycles. The decision clarified that disallowance under Section 14A should be restricted to the exempt income. Therefore, based on the judicial precedents, the Tribunal concluded that the disallowance under Section 14A should be restricted to the exempt income of ₹25, 32,679 only.
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