The Delhi Bench of Income tax Appellate Tribunal (ITAT) has held that disallowance under Section 14A of the Income Tax Act 1961 read with rule 8D could not exceed the quantum of exempted income earned during the particular assessment year.
Assessee, Jubilant Securities Pvt. Ltd was a resident corporate entity. In the course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee had earned exempt income, whereas, it had disallowed expenses under Section 14A of the Income Tax Act.
Being of the view that the disallowance made by the assessee was on ad hoc basis and not in accordance with Rule 8D (2), the Assessing Officer computed with the said rule and computed the disallowance.
After reducing the suo motu disallowance made by assessee, he made a net disallowance. The assessee accepted the disallowance without litigating further. Be that as it may, based on the aforesaid disallowance, the Assessing Officer imposed a penalty under Section 270A of the Income Tax Act.
Anuj Garg, on behalf of the assessee submitted that in the year under consideration, the assessee had earned exempt income by way of dividend. Therefore, the assessee restricted the disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules to the extent of exempt income earned, by following the ratio laid down in various decisions rendered by High Courts and Tribunal.
He further submitted that merely because the assessee accepted the disallowance made by the Assessing Officer, it could not lead to the conclusion that the assessee had under-reported its income.
The two-member Bench of Saktijit Dey, (Judicial Member) And M Balaganesh, (Accountant Member) deleted the penalty holding that as per the ratio laid down in various judicial precedents, the disallowance under Section 14A read with Rule 8D, could not exceed the quantum of exempt income earned during a particular assessment year.
The Bench allowed the appeal filed by the assessee holding that there was a valid reason available to the assessee for restricting the disallowance to the extent of exempt income earned. Merely because assessee accepted the disallowance made by the Assessing Officer, it could not automatically lead to the conclusion that the assessee had under reported its income.
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