Sara International Private Limited Vs ACIT (ITAT Delhi)
ITAT Delhi held that it is settled principle of law that the disallowance under section 14A of the Income Tax Act cannot exceed the exempt income.
Facts- The assessee company is engaged in the trading of iron ore fines, cement, coal, readymade garment, etc. AO observed that the assessee had made huge investments in various quoted and unquoted shares and also paid huge interest on its borrowings. AO concluded that assessee had earned three types of exempt income i.e. Dividend claimed as exempt- Rs.5,56,500/-; Long Term Capital gain on sale of shares- Rs. 1,31,42,773/- and Long term capital gain on conversion of capital asset on which tax has been paid during the year as per the computation of income- Rs.20,56,02,471/-.
Accordingly, AO proceeded to apply the computation mechanism provided in Rule 8D (2) (ii) of the Income Tax Rules for making disallowance u/s 14A of the Act. CIT(A) having appreciated the contentions of the assessee proceeded to confirm the disallowance of expenses u/s 14A of the Act to the extent of suo moto disallowance made by the assessee in the sum of Rs.56,98,750/-, on the ground that the same had been offered voluntarily by the assessee in the return of income. Being aggrieved, both assessee and revenue has preferred the present appeal.
Conclusion- Held that the law is very well settled that the disallowance u/s 14A of the Act cannot exceed the exempt income. We find that the instant case, the exempt income is only Rs.5,56,500/-. Hence, the disallowance u/s 14A of the Act cannot exceed Rs.5,56,500/-.
We are conscious of the fact that by this process, the assessed income might go below the returned income as assessee would be entitled for additional relief of Rs.51,42,250/-(R.56,98,750 – Rs.5,56,500) u/s 14A of the Act. It is trite law that there is no estoppel against the statute.
FULL TEXT OF THE ORDER OF ITAT DELHI
These cross appeals of the Assessee as well as Revenue arises out of the common order of the Learned Commissioner of Income Tax (Appeals)-28, New Delhi, [hereinafter referred to as ‘Ld. CIT(A)’] in Appeal No.82/17-18 dated 21/12/2018 against the order passed by Additional Commissioner of Income Tax, Range-22, New Delhi, (hereinafter referred to as the ‘Ld. AO’) u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) on 28/12/2016 for Assessment Year 2014-15.
2. The following grounds raised by assessee as well as Revenue in the cross appeals:
ITA No.3307/Del/2019 by assessee.
“1. That the Learned Commissioner of Income Tax (Appeals) has erred in confirming disallowance of Rs. 5698750/- u/s 14A of the Act, which was inadvertently voluntarily added by the assessee in the computation of income for the year.
2. That the Learned Commissioner of Income Tax (Appeals) failed to restrict the disallowance u/s 14A to the extent of dividend income of Rs. 556500/- and did not appreciate that the department cannot take the benefit of a mistake committed by the assessee.
3. That the Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs. 1164626/- on account of Commission and brokerage, with total disregard to the facts and circumstances of the case.
4. The assessee reserves his right to add, amend, alter or delete any ground of appeal at the time of hearing.”
ITA No.1974/Del/2019 by Revenue.
“1. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 1,69,15,250/- made u/s 14A of the IT Act, 1961.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in ignoring the fact that the assessee company has invested its borrowed money for such investment of shares, stocks and mutual funds and other investments, as is evident from increasing expenses under the head ‘interest’ which are capable of generating income which does not or shall not from part of total income of the assessee.
3. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 8,11,917/- made on account of Wharfage Charges expenses.”
3. At the outset, we find that there is a delay in filing of appeal by the assessee before us by 56 days. The affidavit and delay condonation petition has been duly furnished by the assessee and on perusal of the same, we hold that the assessee was prevented from the sufficient cause in not filing the appeal in time before us. Accordingly, the delay is hereby condoned and appeal of the assessee is hereby admitted for adjudication.
4. As identical issues are involved in both the appeals they are taken up together and disposed of by this common order for the sake of convenience.
5. Issue No.1- Disallowance u/s 14A of the Act.
Ground No.1 & 2 of assessee’s appeal and Ground Nos. 1 & 2 of Revenue appeal.
We have heard the rival submissions and perused the material available on record. The assessee company is engaged in the trading of iron ore fines, cement, coal, readymade garment, etc. The AO observed that the assessee had made huge investments in various quoted and unquoted shares and also paid huge interest on its borrowings. The Ld. AO concluded that assessee had earned three types of exempt income as under:
(i) Dividend claimed as exempt- Rs.5,56,500/-
(ii) Long Term Capital gain on sale of shares- Rs. 1,31,42,773/-
(iii) Long term capital gain on conversion of capital asset on which tax has been paid during the year as per the computation of income- Rs.20,56,02,471/-.
5.1. In the aforesaid exempt income, the Ld. AO proceeded to apply the computation mechanism provided in Rule 8D (2) (ii) of the Income Tax Rules for making disallowance u/s 14A of the Act. The assessee had made suo moto disallowance of expenses of Rs.56,98,750/- in the return of income u/s 14A of the Act r.w.Rule 8D of the Rules as under:-
