Relief to Mahindra Lifespace Developers: ITAT deletes Disallowance of Rs. 20.50 lakhs [Read Order]

In a major relief to the assessee, M/s Mahindra Lifespace Developers Ltd, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) deleted a disallowance of Rs. 20.50 lakhs.

The assessee filed an appeal for Assessment Year 2005–06 challenging the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, arising from an assessment completed under Section 143(3) read with Section 254 of the Income Tax Act. The sole issue in dispute was the confirmation of a disallowance of ₹20,50,139 under Section 14A of the Income Tax Act, computed at 0.5% of the average value of investments.

In the original assessment, the Assessing Officer had made a disallowance of Rs. 255.29 lakhs under Section 14A of the Income Tax Act. The Commissioner ofIncome Tax (Appeals) granted partial relief, following which the Income Tax Appellate Tribunal, remanded the matter to the Assessing Officer for fresh adjudication.

Upon reconsideration, the Commissioner of Income Tax (Appeals) sustained the indirect expenditure disallowance of Rs. 20.50 lakhs, calculated at 0.5% of average investments. Aggrieved by the sustained disallowance, the assessee preferred the present appeal before the Tribunal.

Section 14A of the Income Tax Act, provides that no deduction shall be allowed for expenditure incurred in relation to income that does not form part of the total taxable income under the Act. Hence if a taxpayer earns exempt income (such as certain dividends, tax-free interest, or income exempt under specific provisions), any expenditure incurred to earn that exempt income cannot be claimed as a deduction against taxable income.

The two-member bench comprising Pawan Singh, Judicial Member and Manoj Kumar Aggarwal, Accountant Member observed that “It is undisputed fact that the assessee has earned exempt dividend income of Rs.8 Lakhs and suffered a disallowance of Rs.20.50 Lakhs which is wholly unjustified.

Further, Rule 8D computation mechanism is not applicable for this year. Therefore, we direct AO to restrict the disallowance to the extent of 10% of exempt income which comes to Rs.0.80 Lakhs. The remaining disallowance stands deleted.”

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