The Income Tax Appellate Tribunal (ITAT), Delhi bench, held that disallowance under Section 14A of the Income Tax Act, 1961, could not exceed exempt income.
The assessee, Sara International Private Limited, is engaged in the trading of iron ore fines, cement, coal, readymade garments, etc. During the assessment proceedings, the AO observed that the assessee had made huge investments in various quoted and unquoted shares and also paid significant interest on its borrowings. The AO concluded that the assessee had earned three types of exempt income, such as:
– Dividend claimed as exempt.
– Long-Term Capital Gain on the sale of shares.
– Long-term capital gain on conversion of capital assets.
Thereafter, the AO proceeded to apply the computation mechanism provided in Rule 8D (2)(ii) of the Income Tax Rules for making disallowance under Section 14A of the Income Tax Act. Furthermore, the assessee had made suo moto disallowance of expenses of Rs. 56,98,750/- in the return of income under Section 14A of the Income Tax Act, r.w. Rule 8D of the Rules.
Aggrieved by the order, the assessee filed an appeal before the CIT(A).
Before the CIT(A), the assessee argued that the AO erred in considering the correct exempt income per se. Therefore, the assessee pointed out that the figure of Rs. 1,31,42,773/-, which was considered as long-term capital gain on the sale of shares by the AO, was actually a long-term capital loss. Thus, the actual exempt income is only Rs. 5,56,500, representing dividend income.
Accordingly, the CIT(A) confirmed the disallowance of expenses u/s 14A of the Act to the extent of the suo moto disallowance made by the assessee in the sum of Rs. 56,98,750/-.
Aggrieved by the order, both the revenue and the assessee filed an appeal before the tribunal.
During the proceedings, Salil Kapoor, counsel for the assessee, argued that in determining the correct exempt income per se, the AO made a mistake. Also, the amount of Rs. 1,31,42,773/-, which the AO had claimed to be a long-term capital gain on the sale of shares, was, in fact, a long-term capital loss. Therefore, dividend income only makes up Rs. 5,56,500/- of the real exempt income.
Anuj Garg, counsel for the Revenue, supported the order of the assessing officers.
After reviewing the facts and records, the two-member bench of M. Balaganesh (Accountant Member) and Anubhav Sharma (Judicial Member) held that disallowance under Section 14A of the Income Tax Act should be restricted to Rs. 5,56,500/- only.
Therefore, disallowance under Section 14A of the Income Tax Act cannot exceed the exempt income.
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