Disallowance under section 14A cannot surpass quantum of exempt income

Short Overview : Disallowance under section 14A cannot surpass the quantum of exempt income.

Solitary issue in appeal by assessee was towards disallowance of interest computed in terms of rule 8D(2)(ii) under umbrella of section 14A confirmed in an ex parte order passed by CIT(A).

 it is held that  Disallowance under section 14A cannot surpass quantum of exempt income. Accordingly, order of CIT(A) was set aside and AO was directed to restrict disallowance to extent of exempt income.

In assessee’s favour.

Followed: Pr. CIT v. State Bank of Patiala (2017) 393 ITR 476 (P&H) : 2017 TaxPub(DT) 1049 (P&H-HC).

IN THE ITAT, AHMEDABAD BENCH

PRADIP KUMAR KEDIA, A.M. & MAHAVIR PRASAD, J.M.

Harish M. Kukreja v. ITO

I.T.A. No. 3508/Ahd/2016

29 January, 2019

Appellant by: Jaimin Shah, AR

Respondent by: Sumeet Kumar Verma, Sr. DR

Pradip Kumar Kedia, A.M.

The captioned appeal has been filed at the instance of the assessee against the order of the Commisioner (Appeals)-III, Ahmedabad (‘CIT (A)’ in short), dated 28-6-2013 arising in the assessment Order, dt. 3-12-2010 passed by the assessing officer (AO) under section 143(3) of the Income Tax Act, 1961 (the Act) concerning assessment year 2008-09.

2. The solitary issue in the captioned appeal agitated by the assessee is towards disallowance of interest amounting to Rs.11,47,958 computed in terms of rule 8D(2)(ii) under the umbrella of section 14A of the Act confirmed in an ex parte order passed by the Commissioner (Appeals).

3. When the matter was called for hearing, the learned AR for the assessee at the outset pointed out that there is a delay of 1191 days in filing the appeal on account of valid reasons as pointed out in the separate petition filed by way of affidavit. The learned AR submitted that the delay is broadly on account of application for rectification pending before the Commissioner (Appeals). The learned AR thereafter submitted that the issue is squarely covered in favour of the assessee and endorsed by the Hon’ble Supreme Court and therefore there was no reason for the assessee not to prefer the appeal before the ITAT within the stipulated limitation period. Learned AR for the assessee thus sought condonation of the delay on the strength of palpable bona fides on the part of the assessee. Considering the circumstances narrated by the AR, we are satisfied towards the existence of sufficient cause for delay in filing appeal before the Tribunal. We also observe that no prejudice will be caused to the Revenue by such condonation per se as the issue involved is prima facie legal in nature and can be adjudicated on the basis of assertions made in the orders of the Revenue authorities itself without going into the factual aspects. The delay is thus condoned.

4. On merits, the learned AR adverted our attention to the assessment order and submitted that the assessee has earned dividend income of Rs.17,819 which is claimed exempt under section 10(34) of the Act. As against the aforesaid exempted income, the assessing officer has embarked upon disallowance of proportionate interest expenditure to the tune of Rs.11,47,958 under section 14A of the Act.

The learned AR pointed out that it is settled position of law that disallowance of expenditure in excess of exempt income is not permissible under section 14A of the Act. The learned AR referred to the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT v. State Bank of Patiala (2017) 393 ITR 476 (P&H) : 2017 TaxPub(DT) 1049 (P&H-HC) wherein it has been clearly held that disallowance under section 14A of the Act cannot exceed the amount of exempt income. The learned AR thereafter submitted that the special leave petition filed by the Revenue against the aforesaid decision of the Hon’ble Gujarat High Court was dismissed on merits by the Hon’ble Supreme Court in SLP (Civil) Diary No(s). 24323/2018, dt. 8-10-2018. The learned AR accordingly submitted that action of the lower authorities for disallowance of interest expenditure in excess of exempt income is without authority of law. The learned AR accordingly submitted that the disallowance at best is required to be restricted to Rs.17,819 instead of Rs.11,47,958.

5. The learned DR, on the other hand, relied upon the orders of the Revenue authorities.

6. We have carefully considered the rival submissions. The solitary issue involved in the present appeal is towards extent of disallowance permissible under section 14A of the Act. We find merit in the plea raised on behalf of the assessee that the disallowance under s.14A of the Act cannot surpass the quantum of exempt income in view of the long line of judicial precedents prevailing in this regard including the decision referred and relied upon by the assessee in State Bank of Patiala (supra) against which the SLP of the Revenue stands dismissed by the Hon’ble supreme Court of India.

Accordingly, we set aside the order of the Commissioner (Appeals) in this regard and direct the assessing officer to restrict the disallowance to the extent of the exempt income.

7. In the result, appeal of the assessee is partly allowed.