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Facts
The revenue appealed against the CIT(A)'s order restricting disallowance under Section 14A and deleting the addition of contract expenses. The assessee had received exempt dividend income, and the AO disallowed expenses under Section 14A and Rule 8D. The AO also made an addition for inflated contract expenses.
Held
The Tribunal held that disallowance under Section 14A cannot exceed the exempt income and that the explanation to Section 14A is prospective. Regarding contract expenses, the CIT(A)'s finding that the AO failed to provide evidence was upheld.
Key Issues
Whether the disallowance under Section 14A should be restricted to the exempt income and if the addition for inflated contract expenses was justified based on evidence.
Sections Cited
14A, 8D, 115JB
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE
O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the revenue is preferred against the order of the ld. CIT(A)-51, Mumbai [hereinafter ‘the ld. CIT(A)’] dated 24/05/2025, pertaining to AY 2017-18.
The grievance of the revenue reads as under:- "i. On the facts and in the circumstances of the case, the la. CIT(A) erred in restricting disallowance made under section 14A of the Income Tax Act, 1961 to the extent of tax exempt income earned by the assessee during the year by overlooking the clarification of legislative intent provided by the CBDT vide Circular No. 5/2014 dated 11.02.2014 and to this effect even an amendment was made by Finance Act, 2022 by way of insertion of Explanation to Section 14A?" ії. "On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of contract expenses of Rs. 2,07,00,000/- without appreciating the fact such expenses are inflated." їїї. "On the facts and in the circumstances of the case, the Ld.CIT(A) erred, in directing to delete the disallowance made u/s 14A of the Income Tax Act, 1961 to the book profit of the assessee without appreciating the provisions of clause (f) of Explanation 1 to 2 section 115JB(2) of the Income Tax Act, 1961 and the decision of the Hon'ble ITAT Mumbai 'F' Bench in the case of Deputy Commissioner of Income-tax, Central Circle -18 & 19, Mumbai vs. Viraj Profiles Ltd. in ITA No. 4439/ (Mum.) of 2013."
The assessee is in the business of manufacturing of terry towels, cotton yarn, bath rugs and bedding products and trading in cotton yarns and fabrics. While scrutinising the return of income, the AO noticed that the assessee has received exempt income by way of dividend at Rs. 3,27,047/-. The assessee was asked to explain, why the disallowance of expenditure should not be made u/s 14A r.w.r 8D. It was strongly contended that the AO has to first record satisfaction about the correctness of the claim of the assessee in respect of expenditure in relation to the income which does not form part of the total income. The assessee further claimed that this shall also apply in the case where an assessee claims that no expenditure has been incurred in relation to the earning of the said exempt income. It was contended that the assessee did not incur any expenditure on earning the exempt income. The contention of the assessee did not find favour with the AO, who proceeded by computing the disallowance as per Section 14A r.w.r. 8D and computed the disallowance at Rs. 4,79,46,684/-. 3.1. Proceeding further the AO on the basis of some evidence collected during the course of such, formed a belief that the assessee had inflated the contract value from 4.95 – 5 Crores to 7 Crores, given to M/s. Jai Shakti Engg. & Construction (Jai Shakti). The assessee was asked to explain the same. The assessee strongly contended that it has not awarded any such contract to Jai Shakti and no such expenses were incurred by the assessee. The AO was of the firm belief that the assessee 3 had inflated expenses by Rs.2.07 Crores. Drawing support from the statement of Shri Bharat Tanvi, VP, who admitted that the contract value of the contract with Jai Shakti was actually Rs.4.95 – 5 Crores and the same was increased to Rs. 7 Crores with the understanding that the sum of Rs.2.07 Crores would be returned in cash. Based upon the statement of Shri Bharat Tanvi and Shri Partha Khamaru, VP (Civil project), The AO made the addition of Rs.2.07 Crores. Proceeding further the AO has made the addition u/s 14A r.w.r. 8D, the AO made adjustment u/s 115JB of the Act to the book profit of the assessee. 3.2. The assessee challenged the assessment before the ld. CIT(A). Insofar as the disallowance u/s 14A of the Act is concerned, the ld. CIT(A) was of the opinion that the disallowance should not exceed the exempt income and accordingly restricted the disallowance to Rs.3,27,047/-.
We have carefully considered the findings of the ld. CIT(A). We are of the considered view that the insertion to the explanation in Section 14A of the Act, is prospective as held by the Hon’ble Delhi High Court in the case of Era Infrastructure 141 taxmann.com 289 and we are further of the view that since the assessee has earned exempt income of only Rs.3,27,047/-, the disallowance cannot exceed the exempt income. Our view is fortified by the decision of the Hon’ble Delhi High Court in the case of PCIT v. Caraf Builders and Constructions Pvt. Ltd. (2019) 414 ITR 122. We, therefore, decline to interfere with the findings of the ld. CIT(A). Ground No. 1 is accordingly dismissed.