ITAT directs AO to work out disallowance u/s 14A on the basis of Investments yielding Dividend [Read Order]

ITAT - AO - Disallowance - undersection 14A - under section 14A - Investments - Dividend - Taxscan

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer to work out disallowance under section 14A on the basis of investments yielding dividend.

The Assessee, Zuari Investments is a company stated to be engaged in the business of dealing in investments, corporate consultancy, depository services etc. Assessee electronically filed its return of income for A.Y. 2013-14 declaring income at Rs. Nil and current year losses to be carried forward. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order and the total loss to be carried forward was determined at Rs.1,21,99,195/-. Aggrieved by the order of AO, the assessee carried the matter before CIT(A) who vide order granted partial relief to the assessee. 

During the course of assessment proceedings, AO noticed that the assessee had received a dividend of Rs.3,44,17,634/- which was claimed as exempt u/s 10(34) of the Act. He also noticed that the assessee had worked out the disallowance of Rs.4,99,833/- u/s 14A r.w.r 8D of the Income Tax Rules. Assessee was asked to provide the working of disallowance u/s 14A of the Act and show- cause as to why the disallowance not be made by following Rule 8D of the I.T. Rules. Assessee inter alia submitted that no interest expenditure has been incurred by assessee for earning the aforesaid dividend income and out of the total salary and allowances, it has identified the gross salary of one Sr. Accounts Officer and part of whole time Director’s salary for the purpose of supervising the investment to be attributable for the purpose of earning exempt income and accordingly assessee had worked out the disallowance u/s 14A at Rs.4,99,833/-. 

The submissions of the assessee was not found acceptable to AO. AO thereafter by following the methodology prescribed under Rule 8D worked out the disallowance at Rs.42,44,195/- and after giving the credit of the suo moto disallowance of Rs.4,99,833/- made net disallowance of Rs.37,44,362/- u/s 14A of the Act. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who for the reasons noted in the order upheld the order of AO. 

The coram of Judicial Member Narendra Kumar Choudhary and Accountant Member Anil Chaturvedi held that Section 14A of the Act cannot be involved when no exempt income was earned. The assessee has submitted that out of the total investments which the AO has considered for working of disallowance u/s 14A r.w.r 8D, the investments which had yielded dividend. The contention of the assessee that it has received dividend only from the aforesaid investments has not been controverted by Revenue. In such a situation, relying on the aforesaid decisions, we are of the view that disallowance u/s 14A needs to be re-worked on the basis of the investments which have yielded tax free income

“We therefore direct the AO to work out the disallowance u/s 14A r.w.r 8D on the basis of investments which had yielded dividend,” the ITAT said.

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