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Income Tax Appellate Tribunal, BANGALORE BENCH C, BANGALORE
Before: SHRI. ABRAHAM P. GEORGE
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'C', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER (Assessment Year : 2012-13) M/s. Tranquil Realty P. Ltd, No.3, 3rd floor, Vaswani Victoria, Victoria Road, Bengaluru 560 047 .. Appellant PAN : AABCD0009Q v. Income-tax Officer, Ward – 12(2), Bengaluru .. Respondent Assessee by : Shri. Suresh Muthukrishnan, CA Revenue by : Smt. Swapna Das, JCIT Heard on : 23.06.2016 Pronounced on : 15.07.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by assessee it assails disallowance of Rs.4,02,442/- made u/s.14A of the Income-tax Act, 1961 (‘the Act’ in short) r.w.Rule 8D, which was confirmed by the CIT (A).
Facts apropos are that assessee had investment to the tune of Rs.3,00,67,074/- in mutual funds and during the relevant previous year it ITA.185/Bang/2016 Page - 2 earned dividends of Rs.67,074/- which it had claimed as exempt u/s.10(34) of the Act. During the assessment proceedings, AO worked out a disallowance of Rs.4,02,440/-, relying on Rule 8D. Though it was claimed by the assessee that the entire expenditure was capitalised and no disallowance could be made, this was not accepted.
Assessee’s appeal before the CIT (A) did not meet with any success.
Before me, Ld. AR submitted that disallowance u/s.14A of the Act at the best could never be more than the exempt income. In support of this he relied on the judgment of Hon’ble Delhi High Court in the case of Joint Investments P. Ltd v. CIT [ITA.117/2015, dt.25.02.2015].
Per contra, Ld. DR supported the order of lower authorities.
We have perused the orders and heard the rival contentions. It is not disputed that assessee had claimed exemption only for Rs.67,074/- being the dividend received by it from mutual fund investments. In the case of Joint Investments P. Ltd, (supra), Hon’ble Delhi High Court held as under at para 9 of its judgment :
In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing 2,97,440/- as a disallowance under Section 14A had to ITA.185/Bang/2016 Page - 3 be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no security of the accounts by the AO, an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,26,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. 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 the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.
For the above reasons, the impugned order of the ITAT is set aside. The question of law is answered in favour of the assessee. Consequently, order of the AO is set aside. The initiation of penalty proceedings also is set aside. The matter is remitted to the AO for fresh consideration in accordance with the above directions. The appeal is partly allowed.
Their Lordship has clearly observed that the window for disallowance u/s.14A of the Act is only to the extent of a portion of the tax exempt income and could not swallow the entire amount. If the contention of the Revenue is accepted disallowance would be much more than the claim of exempt income. In view of the judgment of Hon’ble Delhi High Court mentioned above, this is patently incorrect. I therefore hold that ITA.185/Bang/2016 Page - 4 maximum amount that could have been disallowed u/s.14A of the Act, is Rs.67,074/- and nothing more. Assessee is given relief to this extent. Ordered accordingly.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 15th day of July, 2016.