Section 14A Disallowance can’t exceed Exempt Income earned during the AY: ITAT [Read Order]

Disallowance - income - ITAT - Taxscan

The Banglore Bench of Income Tax Appellate Tribunal (ITAT) ruled that Section 14A Disallowance cannot exceed exempt income earned during the Assessment Year.

The assessee, M/s.GMR Enterprises Pvt. Ltd. is a private limited company. For the assessment year, the return of income was filed on 28.11.2015 declaring loss of Rs.50,95,80,349 and book profit loss of Rs.45,82,24,981. In the return of income the assessee had made voluntary disallowance under section 14A of theIncome Tax Act of Rs.145,02,09,668. The assessee during the relevant assessment year had received exempted income of Rs.27,37,47,187. The assessee filed revised computation of income during the course of assessment proceedings. In the revised computation, the assessee had restricted the disallowance under section 14A of the Income Tax Act to the exempted income earned of Rs.27,37,47,187 for the relevant assessment year. The assessee during the course of assessment proceedings, by placing reliance on various judicial pronouncements submitted that the disallowance under section 14A of the Income Tax Act is to be restricted to the exempted income earned for the relevant assessment year.

The Assessing Officer by placing reliance on the CBDT Circular No.5/2014 dated 11.02.2014, held that even if there is no exempt income earned by the assessee during the year, disallowance u/s 14A can be made. Pursuant to the draft assessment order dated 28.12.2018, the assessee filed objections before the Dispute Resolution Panel (DRP).

The DRP vide its directions dated 30.09.2019, upheld the disallowance u/s 14A amounting to Rs.145,02,09,668. The DRP by placing reliance on the judgment of the Orissa High Court in the case ofOrissa Rural Housing Development Corporation Ltd. v. ACIT in Writ Petition (C) No.4554 of 2011, held that an error or omission can be rectified only filing a revised return within the prescribed time limit u/s 139(5) of the I.T.Act. Therefore, it was concluded by the DRP that the assessee is not entitled to raise such a claim before the Assessing Officer nor the Assessing Officer is empowered to entertain such claim. Pursuant to the DRP’s direction, final assessment order was passed.

The coram of Accountant Member B.R.Baskaran and Judicial Member George George K held that the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income of Rs.27,37,47,187 was earned on investment and consequently the amount of disallowance, if at all, to be made is to be restricted to Rs.27,37,47,187.

“In view of the above judgment of the Madras High Court in the case of M/s.Marg Limited v. CIT it is clear that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income. Therefore, the AO is directed to restrict the disallowance u/s 14A of the I.T.Act to Rs.27,37,47,187,” the ITAT order read.

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