In a recent case, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the disallowance under section 14A of the Income Tax Act, 1961 can be made only in respect of investments that yield tax-free income.
Bhartiya International Ltd, the assessee challenged the final assessment order dated 29.07.2022 passed under Section 143(3) r.w. Section 144B r.w. Section 144C(13) passed in pursuance of directions issued by the Dispute Resolution Panel (DRP) dated 02.06.2022 read with rectification order dated 28.06.2022 passed by DRP under Rule 13 of the Dispute Resolution Panel Rules, 2009.
In the draft assessment order, the AO observed that the assessee has claimed Rs.11,90,44,517/- towards commission, brokerage and discount expenses. The party-wise details of expenses along with details of TDS deducted if any was called for. The reply of the assessee was obtained. It was alleged in the draft assessment order that the assessee has not provided any details of the TDS deduction made on these expenses.
The assessee has earned exempt income of Rs.1,01,073/- only during AY 2017-18 in question as evident from the statement of total income and the audited financial statements placed in the paper book. As against such exempt income, the assessee has made suo motu disallowance of Rs.2,52,249/- based on 1% of the average value of investment from which tax-free dividend income was received. The assessee thus contends that because of suo motu disallowance which far exceeds the exempt income, no further disallowance is permissible under Section 14A r.w. Rule 8D of the Income Tax Rules, 1963.
In the light of the submissions made on behalf of the assessee, no further disallowance under Section 14A is called for in the light of the judgment rendered in the case of Joint Investments P. Ltd. Vs. CIT, and Pr.CIT vs. Caraf Builders and Constructions P. Ltd. (2019.
A two-member bench comprising Shri Saktijit Dey, Vice President & Shri Pradip Kumar Kedia, Accountant Member viewed that “It was well-settled law that disallowance under Section 14A can be made only in respect of those investments that have yielded tax-free income during the year as held in Caraf Builders and ACB India Ltd. vs. ACIT (2015).”
The ITAT while allowing the appeal directed the AO to delete the disallowance under Section 14A made over and above the disallowance offered by the assessee.
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