ITAT: Tax Section 14A Disallowance Not Justified When No Exempt Income Generated

The disallowance under Section 14A of the Income Tax Act does not warrant when there is no earned of an exempted income, as per the Delhi Bench of the Income Tax Appellate Tribunal (ITAT).

Section 14A predicts that there must be an actual receipt of income as seen by the two-member bench of Anubhav Sharma (Judicial Member) and Anil Chaturvedi (Accountant Member) and therefore section 14A of the act shall not be applicable in which there is no receiving of the income which is exempted or receivable in the related former year.

The taxpayer would be a multi-state cooperative society enrolled beneath the Multi-State Cooperative Societies Act 2002. Via its different operating units, the taxpayer would be involved in the manufacturing and trading of the chemical fertilizers

The taxpayer’s case was chosen for the investigation. In the assessment proceedings, AO cited, the taxpayer has made an income that is free from tax through the method of dividends. He indeed specified, as opposed to Rs. 798.49 crores in the former assessment year the taxpayer has investments amounting to Rs 1701.83 crores.

AO cited, the taxpayer has made an interest along with the additional expenses. Interest-bearing funds would be utilised to do the investment, AO considered. He had implemented Rule 8D read with Section 14A and operated out the disallowance under Rule 8D(2)(iii) of the Income-tax Rules at Rs. 6.25 crores. The aggregate disallowance which has been functioned through AO was Rs 55,960,00,000 and on the basis of the disallowance of the interest expenditure under Rule 8D(2)(ii).

The taxpayer would have taken the case to CIT (Appeals) and provided ease to the taxpayer by cancelling the disallowance to an extent of Rs 49.71 cr while sustaining the disallowance under Rule 8D(2)(iii) of Rs. 6.25 crore.

The taxpayer argued, there would a restriction of the disallowance under Rule 8D(2)(iii) of the Income-tax Rules on the investments that render exempt income. As the taxpayer has made Rs 2.48 cr as an exempted income, there must be a restriction of the disallowance to that specific amount.

The tribunal stated no finding through the lower authorities is been revealed that all the investments do not produce the exempted income.

Read also: ITAT Cancels Disallowance Due to Absence of Exempted Income U/S 14A

Before the AO’s desk, ITAT returned the case and rendered him to compute the disallowance under Rule 8D(2)(iii) of the Income-tax Rules as per the exempted income and within the law.