Facts of the Case

The assessee company earned certain exempt income during the relevant assessment year. During scrutiny assessment under Section 143(3), the Assessing Officer invoked Section 14A read with Rule 8D to compute disallowance of expenditure allegedly incurred in relation to such exempt income.

The disallowance calculated by the Assessing Officer exceeded the amount of exempt income earned by the assessee.

The Commissioner of Income Tax (Appeals) confirmed the action of the Assessing Officer, leading to appeal before the Tribunal.

 Issues Involved

  1. Whether disallowance under Section 14A can exceed the amount of exempt income.
  2. Whether Rule 8D computation must be restricted to actual exempt income earned.
  3. Whether the lower authorities correctly applied the law.

Petitioner’s (Assessee’s) Arguments

  • The disallowance computed under Rule 8D was excessive and disproportionate.
  • Expenditure relating to exempt income cannot exceed the exempt income itself.
  • Judicial precedents consistently restrict disallowance to the amount of exempt income.

 Respondent’s (Revenue’s) Arguments

  • The Assessing Officer applied Rule 8D as prescribed.
  • The computation method under the Rules justified the disallowance.
  • Therefore, the order of the lower authorities should be sustained.

 Court Order / Findings (ITAT)

  • Disallowance under Section 14A is intended to neutralize expenditure incurred to earn exempt income.
  • Such disallowance cannot logically exceed the exempt income itself.
  • Courts have repeatedly held that excessive disallowance is impermissible.

 Important Clarification by the Tribunal

  • Rule 8D is a machinery provision and cannot override the basic principle of Section 14A.
  • Disallowance must be reasonable and proportionate.
  • Taxation provisions should not lead to absurd or punitive outcomes.

 Link to download the order

https://itat.gov.in/public/files/upload/1652942156-28Alld%202020%20Sutluj%20pdf.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.