Pragathi Krishna Gramin Bank Vs JCIT (Karnataka High Court)
The Karnataka High Court considered two appeals filed by the assessee bank for Assessment Years 2011-12 and 2012-13 challenging the order of the Income Tax Appellate Tribunal. The appeals raised two substantial questions of law: (i) whether the disallowance under Section 14A read with Rule 8D could exceed the expenditure incurred for earning exempt income, and (ii) whether the assessee was entitled to claim a higher deduction under Section 36(1)(viii) by adding back amortization and depreciation on Statutory Liquidity Ratio (SLR) investments while computing profits.
With respect to Section 14A, the Assessing Officer disallowed ₹2,48,85,000 as expenditure incurred for earning exempt dividend income of ₹1,80,30,965 for AY 2011-12 by applying Rule 8D. Similar additions were made for AY 2012-13 and were upheld by the appellate authorities. The assessee contended that no expenditure had actually been incurred for earning the dividend income from statutory SLR investments and argued that the disallowance under Section 14A read with Rule 8D could not exceed the actual expenditure claimed. The Revenue argued that the Assessing Officer had relied on the computation furnished by the assessee under Rule 8D.
The High Court held that disallowance under Section 14A must be computed in accordance with Rule 8D and should relate to expenditure actually incurred in earning exempt income. It observed that the Assessing Officer had not undertaken an independent computation and had instead relied upon a calculation furnished by the assessee. The Court found that disallowing expenditure of ₹2,48,85,000 against exempt dividend income of ₹1,80,30,965 was irrational and lacked any reasonable basis. It held that the disallowance under Section 14A cannot be based on conjecture or arbitrary estimates and must have a rational nexus with the expenditure actually incurred. The Court also observed that the Assessing Officer could not require the assessee to compute the disallowance on his behalf, as the statutory obligation to determine the disallowance rests upon the Assessing Officer. Consequently, the findings of all the authorities on the Section 14A issue were set aside and the matter was remanded to the Assessing Officer for fresh computation in accordance with law.
