In the continuing saga of disallowance u/s 14A and for the purpose of computation of disallowable amount under Rule 8D of Income Tax Rule, two recent judgments- one from Kolkata ITAT and another from Mumbai ITAT- are welcome relief for many tax payers specially those who have to bear the burnt of disallowance under section…
Over zealous tax authorities have many time blindly applied Rule 8D read with provision under section 14A to disallow expenditure more than actual claim by the assessee. This create a bizarre situation where the tax department is disallowing an expense , for which assessee dis not claim any allowance. Gillette Group India (P.) Ltd. vs ACIT 12(1), New Delhi 16 ITR(TRIB.) 57 (DELHI)/ is one such case.
Section 14A disallowance: Facts of the Case
The case relates to assessment year 2008-09 .The total expenditure claimed by the assessee in the profit & loss account was only Rs. 49,04,028/- while the Assessing Officer disallowed Rs. 2,37,59,757/- u/s 14A . On appeal , the CIT(Appeals) also confirmed the order of the A.O.
Section 14A : ITAT Delhi held as under
From the above, it is evident that as per sub-section (1) of Section 14A, no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income. Sub-section (2) of Section 14A provides the procedure for determination of such expenditure by the Assessing Officer. The Board has also prescribed Rule 8D for determining the expenditure incurred by the assessee for earning of exempt income. Thus, the disallowance can be made under sub-section (1) for the expenditure incurred for earning of exempt income. In the case under appeal before us, from the perusal of the assessee’s profit & loss account, it is evident that the total expenditure incurred was Rs. 49,04,028/- only. Thus, the assessee claimed the deduction for the expenditure of Rs. 49,04,028/- which is debited to the profit & loss account. The disallowance cannot exceed the expenditure actually claimed by the assessee. We, therefore, accept the assessee’s contention that the disallowance made by the Assessing Officer and sustained by the learned CIT(A) in excess of total expenditure debited to profit & loss account was unjustified. Accordingly, we restrict the disallowance to the extent of expenditure actually claimed by the assessee i.e. Rs. 49,04,028/-.
Although this kind of mindless orders of disallowance u/s 14A of the Income Tax Act are not the order of day , yet readers should file instant appeal quoting the above decision of ITAT , Delhi
The assessee a dealer in shares and securities earned dividend income from shares. The assessee claimed expenditure on brokerage of arranging interest free loan which was for payment of conversion cost of its stock of partly paid shares into fully paid shares.
The Assessing Officer disallowed this amount on the ground that it was spent for earning exempt income. On appeal, while the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal restricted disallowance to the extent related to earning of dividend income as the loan had been utilized for the purchase of shares and the profit earned by sale of those shares was offered as business income. The Tribunal, therefore, directed the Assessing Officer to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law.
Before the High Court, the assessee contended that it had incurred expenditure for purchasing shares. 63 per cent of the shares so purchased were sold and the income derived there from was offered to tax as business income and the remaining 37 per cent of shares remained unsold and yielded dividend and, therefore, no expenditure could be attributed to the said dividend income.
The issue before in CCI vs JCIT,Udupi Range  20 taxmann.com 196 (Kar.) was
Whether the provisions of Section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation?
Hon’ble held vide its order 2/28/2012 as under :
When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63 per cent of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37 per cent of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside
the Assessing Officer completed assessments without making disallowances under Section 14A even though the assessee had incurred expenditure mainly by way of interest incurred on borrowed funds diverted for investments in securities, shares etc, the income wherefrom were exempt from tax. By virtue of the prohibition contained in the proviso, the Assessing Officer was disabled from either making income escaping assessment under Section 147 or by rectifying assessment under Section 154. However, since the proviso to Section 14A does not expressly bar the Commissioner from invoking suo motu revisional powers under Section 263 of the Act, in exercise of such powers the Commissioner set aside the assessments and directed reassessment for making disallowances for the past years. When the matter reached the Tribunal, the Tribunal allowed assessee’s claim by holding that disallowance cannot be made by reopening of concluded assessments in exercise of powers conferred under Section 263 of the Act by the Commissioner. It is against these orders, the matter reached this Court in appeals.
The issue before Kerala High Court in CIT vs Catholic Syrian Bank Ltd Catholic Syrian Bank Ltd was
Whether CIT Can Invoke Power u/s 263 to protect interest of revenue if A.O is barred to assess any income?
Hon’ble Kerala High Court held vide its order 3/27/2012 as under :
4. So far as the decision on merit in these cases is concerned, we have only followed judgment of the Division Bench this Court in I.T.A.No.587/2009 dated 14/01/2010 wherein this Court clearly held that if the Revenue’s claim is allowed, then the prohibition under the proviso against the Assessing Officer to revise concluded assessments for making disallowance under Section 14A can be neutralised and defeated by referring concluded assessments to the Commissioner for initiating suo motu revisional power under Section 263 of the Act. In other words, we felt that the proviso is not procedural but guarantees vested rights of parties against reopening concluded assessments. So far as concluded assessments are concerned, the proviso makes it clear that the assessee should not be subjected to disallowance either by reopening assessment under Section 147 or under Section 154 for raising demand of tax after disallowance or for withdrawing refund granted. If the right of the assessee cannot be taken away by the Assessing Officer, we see no reason why it can be permitted to be done by the Commissioner under Section 263 to achieve the same purpose, which is prohibited under the proviso to Section 14A. We therefore do not find any mistake in the judgment warranting interference in review. Consequently, these review petitions are dismissed
The assessee engaged in manufacturing and export of engineering goods. The Assessing Officer disallowed claim for bad debts under section 36(1)(vii) on ground that assessee had claimed deduction under section 80HHC and in such a situation claim for bad debts be hit by Section 14A of the Act. The CIT(A) partly upheld the claim of the assessee.The Tribunal agreed with view of CIT(A).
The issue before PUNJAB AND HARYANA High Court in CIT vs Kings Exports 318ITR 100 was
“Whether on the facts and in law, the Hon’ble Income Tax Appellate Tribunal was justified in restricting the addition of Rs.8,37,978 instead of Rs. 29,25,622 made by the Assessing Officer, in view of the provisions of section 14A of the Income-tax Act, 1961 by disallowing the deduction claimed on account of ‘Bad Debts’ written off under section 36(1)(vii) of the IT Act, 1961 as these ‘Bad Debts” written off included incomes not received, which were declared on accrual basis in Asstt. Years 2000-01, 2002-03 and 2003-04 and deduction under section 80HHC was claimed on same by assessee in the respective years?
Hon’ble PUNJAB AND HARYANA High Court held vide its order 8/25/2009 as under :
4. We have heard learned counsel for the revenue.
5. On perusal of section 80HHC and section 14A, it is clear that expenditure incurred from export income be held to be for earning Income which not form part of total income, which concept is dealt with under section 10 of the Act. Section 80HHC deals with deduction of the element of profit from export from taxable income.
6. In these circumstances, no substantial question of law arises.