VANI POTLURI,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX, CIRCLE-9(1), HYDERABAD

Subsequently, the case was selected for scrutiny under CASS and notice u/s 143(2) was issued and served on the assessee. In response to the said notice, the AR of the assessee filed the required information.

1 On verification of the profit & loss account, the AO noticed that the assessee had claimed an amount of Rs. 56,21,536/- towards interest. On verification of the balance sheet and books of account, he noticed that the advances from customers stood at Rs. 4,73,66,679/- as well as loans taken were invested in companies towards long term investments to the tune of Rs.5,05,14,831/-. He, therefore, computed the disallowance u/s 14A r.w.r 8D at Rs. 14,52,640/-

Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and submitted that section 14A provides for disallowance of expenditure incurred in relation to income not includible in the total income. However, the AO has considered the disallowance of interest expenditure of Rs. 14,52,640/- against the income claimed as exempt of Rs. 2,59,298/-. She contended that no prudent businessman would incur the expenditure of Rs. 14 lakhs to earn income which is very meagre of Rs. 2.5 lakhs.

After considering the submissions of the assessee, the CIT(A) confirmed the disallowance made by the AO.

Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal:

Considered the rival submissions and perused the material on record. In this case, the assessee claimed exempt income in the return of income is only Rs. 2,59,298/-, whereas, the AO computed the disallowance of expenditure u/s 14A at Rs. 14,52,640/-. The grievance of the assessee is that disallowance u/s 14A cannot exceed the exempt income. We find that the Hon’ble Delhi High Court in the case of Joint Investments (P.) Ltd. All ITAT (5433) ITAT Mumbai (1687) held that the window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to exempt income. Therefore, we are of the view that disallowance under section 14A cannot exceed the exempt income, and, hence, we direct the assessing officer to restrict disallowance under section 14A to the extent of exempt income earned by the assessee. Accordingly, ground Nos. 2 to 4 are allowed.

1

2 Ground Nos. 1 & 6 are general in nature.

In the result, appeal of the assessee is allowed. Pronounced in the open court on 9th November, 2018. (P. MADHAVI DEVI) ACCOUNTANT MEMBER