The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the disallowances cannot be made under Section 14A of the Income Tax Act, 1961 earnings from the exempt income hence deleted the additions made in income.
The assessee is a partner in the partnership firm and derives income from other sources and claimed exemption of share of profit from the partnership firm under Section 10(2A) of the Income Tax Act. The assessee has filed the return of income disclosing a total income of Rs. Nil.
Subsequently, the case was selected for scrutiny under CASS, and notices under Section 143(2) and 142(1) of the Income Tax Act are issued.
The Assessing Officer (AO) on perusal of financial statements found that the assessee is holding huge investments having the potential of earning exempt income. Since the assessee has not made the disallowance under Section 14A r.w.r 8D of Income Tax Rules, the Assessing Officer has issued a notice under 142(1) of the Income Tax Act for invoking the provisions.
The Departmental Representative submitted that the Commissioner of Income Tax (Appeal) [CIT(A)] has erred in granting relief to the assessee irrespective of the facts that the disallowance under Section 14A r.w.r 8D has to be computed through exempt income is not earned
It was further submitted that the Commissioner of Income Tax (Appeal) has erred in deleting the disallowance of interest expenses without appreciating that the assessee has received borrowed funds at a higher rate as against the lower rate of interest received and relied on the order of the Assessing Officer.
The two-bench member comprising of Pavan Kumar Gadale (Judicial member) and Rifaur Rahman (Accountant member) held that the Commissioner of Income Tax (Appeal) had relied on the facts, judicial decisions, and provisions of the Act in respect of disallowance under Section 14A r.w.r 8D of the Income Tax Act.
Prima facie, the assessee has not earned any exempt income, and therefore the provisions of Section 14A r.w.s 8D of the Income Tax Act cannot be invoked.
In respect of the disallowance of interest expenditure under Section 57 of the Income Tax Act, the grievance of the revenue that the assessee has paid a higher rate of interest to the Lenders and has received a lower rate of interest.
There was no infirmity found in the order of the Commissioner of Income Tax (Appeal), therefore upheld the same and dismissed the grounds of appeal of the revenue.
Thus, the appeal filed by the revenue was dismissed.
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