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Facts
The Assessing Officer (AO) disallowed a sum of ₹ 17,91,403 under Section 14A read with Rule 8D for earning exempted income. The assessee contended that the disallowance cannot exceed the exempted income earned. The CIT-A confirmed the AO's order.
Held
The Tribunal held that disallowance under Section 14A read with Rule 8D cannot exceed the amount of exempt income earned by the assessee, as per settled legal position from various High Courts and the Supreme Court. The AO was directed to recompute the disallowance.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D can exceed the amount of exempt income earned by the assessee.
Sections Cited
14A, Rule 8D
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Income Tax Appellate Tribunal, ‘A’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI PRAKASH CHAND YADAV
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 18/06/2024 vide DIN No. ITBA/NFAC/S/ 250/2024-25/1065707293(1) for the assessment year 2016-17.
In the present case, the AO during the assessment proceedings found that the assessee has earned exempted income but the assessee has not made any disallowance under the provisions of section 14A of the Act r.w.r. Rule 8D of Income Tax Rule. Accordingly, the AO invoked the provisions of rule 8D and made the disallowance of ₹ 17,91,403 and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT-A who confirmed the order of the AO.
4. Being aggrieved by the order of learned CIT-A, the assessee is in appeal before us.
5. The learned AR before us submitted that the disallowance under the provisions of section 14A of the Act read with rule 8D of Income Tax Rule cannot exceed the amount of exempted income earned by the assessee during the year. As such it was prayed by the learned AR that the disallowance should be limited to the extent of the exempted income earned by the assessee.
On the other hand, the learned Departmental Representative (DR) argued that the computation under Rule 8D was correctly applied by the AO as per the provisions of the Act. However, it was also fairly admitted that the recent judicial pronouncements have restricted such disallowances to the extent of exempt income.
We have heard the submissions of both parties and perused the materials available on record. We find that the Hon’ble Courts have consistently held that the disallowance under section 14A read with Rule 8D of Income Tax Rules cannot exceed the amount of exempt income earned by the Assessee. The Hon’ble HIGH COURT OF PUNJAB AND .
Page 3 of 4 HARYANA in the case of Principal Commissioner of Income-Tax, Patiala v. State Bank of Patiala reported in 99 taxmann.com 285 has categorically held that the disallowance under section 14A should not exceed the exempt income earned by the taxpayer.
It is not disputed by the learned counsel for the appellant-revenue that the issue involved in the present case stands concluded against the revenue in of 2016, Pr. CIT v. State Bank of Patiala [2017] 393 ITR 476/88 taxmann.com 667 (Punj. & Har.) decided on 27.02.2017 wherein after considering the relevant provision and the case law on the point, it was recorded as under:— "After hearing learned counsel for the parties, we notice that the issue on merits has been decided in favour of the assessee in State Bank of Patiala's case (supra) [(2017) 78 Taxman.com 3]. The amount of disallowance under Section 14A was restricted to the amount of exempt income only and not at a higher figure. Once that was so, we do not consider it appropriate to discuss the scope of Section 263 of the Act as the same has been rendered academic in view of the issue being answered in favour of the assessee on merits. Thus, no substantial question of law arises. Consequently, the appeal stands dismissed." Similar decision was taken by this Court in of 2017, Pr. CIT v. State Bank of Patiala decided on 22.05.2017.
In view of the above, no substantial question of law arises in the present appeal and consequently, the appeal stands dismissed.
7.1 The above view taken by the Hon’ble High Court was subsequently upheld by the Hon’ble Supreme Court reported in 98 taxmann.com 286. Respectfully following the settled legal position, we direct that the disallowance under section 14A read with Rule 8D of the Income Tax Rules be restricted to the extent of the exempt income earned by the Assessee during the relevant assessment year. The AO is directed to recompute the disallowance accordingly.
In the result, the appeal of the Assessee is partly allowed.