Disallowance u/s 14A

DCIT vs. Jindal Photo Limited (ITAT Delhi)- As per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee ’s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule.. Full Article

The AO’s argument that the assessee could have utilized its surplus funds for repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 (P&H) where Abhishek Industries was distinguished and it was held disallowance u/s 14A of interest on borrowed funds was not permissible if the investment in share.. Full Article

As per well settled law and also according to canons of taxation only that expenditure which is relatable to taxable income should be deducted in computing the total income. Expenditure which has a bearing on exempt income should not be considered in the computation of total income as otherwise this would result in double advantage to the assessee. Full Article

The assessee earned dividend income on shares which was exempt from tax. The AO took the view that the investment in shares was made out of borrowed funds on which interest expenditure was incurred and consequently made a disallowance u/s 14A. This was partly upheld by the CIT (A). On further appeal by the assessee, the Tribunal deleted the disallowance by noting that the assessee had proved that the investment in shares was made out of non-interest bearing funds. Full Article