ITAT: Under Section 14A of Income Tax Act, Disallowance Cannot Exceed the Exempt Income Earned by the Assessee

ITAT: Under Section 14A of Income Tax Act, Disallowance Cannot Exceed the Exempt Income Earned by the Assessee

The Income Tax Appellate Tribunal (ITAT), Mumbai has held that disallowance under Section 14A of the Income Tax Act, 1961 (the Act) read with Rule 8D cannot be more than the exempt income earned by the assessee.

The division-member bench comprising of Kuldip Singh (Judicial Member) and Gagan Goyal (Accountant Member) were hearing an appeal filed in the matter of Asstt. Commissioner of Income Tax vs. Businessmatch Services (India) Pvt. Ltd.

Factual matrix of the case was that the assessee was into the business of investment in shares and immovable properties, finance activities and trading in shares and securities. The assessee had suo-moto disallowed an amount of Rs.9,60,000/- under section 14A read with Rule 8D being 20 per cent of the fee paid by the assessee to M/s. K. Right Management Solution Pvt. Ltd. being the advisor on investment.

The issue that came up for consideration before the ITAT was whether the Ld. Commissioner of Income Tax (Appeals) (in short CIT[A]) had rightly restricted the disallowance made by the Assessing Officer (AO) under section 14A read with Rule 8D to Rs. 9,60,000 as against disallowance of Rs.3,33,36,712 made by the AO, which was more than the dividend income earned by the assessee during the year under consideration.

The ITAT affirmed that by now it is a settled proposition of law that disallowance under section 14A read with Rule 8D cannot be more than the exempt income earned by the assessee.

As per Section 14A of the Act, the expenditure incurred by a taxpayer in relation to income that excludes total income as per the provisions of the Act should not be considered as deduction while computing the total income of the taxpayer.

In the instant case, the ITAT noted that the assessee had suo-moto disallowed an amount of Rs.9,60,000 under section 14A read with Rule 8D which is more than the dividend income of Rs.7,29,565 earned by the assessee.

By placing reliance on decisions rendered by Bombay High Court in cases of HSBC Invest Direct (India) Ltd. (2020) and the decision passed by the Supreme Court in PCIT vs. Oil Industry Development board, the CESTAT observed that that disallowance under section 14A should be restricted to amount of exempt income of assessee only and not a higher income.

Hence, in view of the observations, the CESTAT dismissed the appeal filed by the revenue.