INCOME TAX ACT, 1961

Section 14A

Disallowance under section 14A - Expenditure against exempt income - Disallowance made by AO in excess of tax-exempt income -

AO observed that assessee had invested in quoted and unquoted shares and units of mutual funds but no disallowance under section 14A was made in the return of income by the assessee. AO accordingly invoked the computation mechanism provided under rule 8D and made disallowance in excess of the exempt dividend income earned. Assessee contended that the investments made by assessee in subsidiary company were to be considered as strategic investment and hence the same should be kept outside the ambit of computation mechanism provided in rule 8D. And disallowance under section 14A could be restricted only to the extent of dividend income. Held: In view of the decision in Jt. Investments (P) Ltd. v. CIT (2015) 372 ITR 694 (Del) : 2015 TaxPub(DT) 1375 (Del-HC), 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 of the tax-exempt income surely cannot swallow the entire amount as has happened in the subject case. Accordingly, AO was directed to restrict the disallowance to the extent of exempt income.

Cited:Maxopp Investment Ltd. v. CIT, New Delhi and Pr. CIT-I v. D.B. Corp Ltd. (2018) 402 ITR 640 (SC) : 2018 TaxPub(DT) 1403 (SC). Followed:Jt. Investments (P) Ltd. v. CIT (2015) 372 ITR 694 (Del) : 2015 TaxPub(DT) 1375 (Del-HC).