Facts of the Case

  • The Revenue filed appeals under Section 260A concerning Assessment Years 2011-12, 2012-13, and 2013-14.
  • The Assessing Officer applied Rule 8D(2)(ii) and made a disallowance of ₹39,05,855 under Section 14A.
  • The assessee had earned exempt dividend income of ₹47,950 only during the relevant year.
  • The disallowance made was disproportionately high (over 8000% of exempt income).
  • The Commissioner of Income Tax (Appeals) restricted disallowance to ₹1,644 based on average dividend-yielding investments.
  • The ITAT upheld the CIT(A)’s order relying on earlier Delhi High Court judgment in the assessee’s own case 

Issues Involved

  1. Whether disallowance under Section 14A read with Rule 8D can exceed the exempt income earned by the assessee.
  2. Whether the methodology adopted by the Assessing Officer was justified.
  3. Applicability of prior judgments including assessee’s own case and Supreme Court ruling in Maxopp Investment Ltd 

Petitioner’s Arguments (Revenue)

  • The Assessing Officer correctly invoked Rule 8D for computing disallowance.
  • Disallowance was based on statutory formula under Rule 8D(2).
  • The ITAT erred in restricting disallowance without proper application of Rule 8D.

Respondent’s Arguments (Assessee)

  • Disallowance cannot exceed exempt income earned.
  • The computation by the Assessing Officer was arbitrary and excessive.
  • Reliance was placed on earlier Delhi High Court judgment in assessee’s own case (AY 2008-09).
  • Only investments yielding exempt income should be considered for disallowance.

Court Findings / Order

For AY 2011-12 (ITA 1255/2018 & 1257/2018):

  • The High Court refused to issue notice and dismissed the Revenue’s appeals.
  • It upheld the ITAT and CIT(A) approach limiting disallowance.
  • Recognized that disallowance was excessively higher than exempt income.

For AY 2012-13 & 2013-14 (ITA 1254/2018, 1256/2018, 1258/2018, 1259/2018):

  • The Court issued notice for further consideration.
  • Held that the matter requires examination in light of the Supreme Court ruling in Maxopp Investment Ltd. vs CIT (2018) 402 ITR 640 (SC).

Important Clarification

  • Disallowance under Section 14A should be reasonable and proportionate to exempt income.
  • Mechanical application of Rule 8D leading to absurd or excessive disallowance is not sustainable.
  • Judicial precedents, especially assessee’s own earlier case and Supreme Court rulings, must be considered.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:8342-DB/SKN27112018ITA12552018_114115.pdf

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