Case Law Details
Jubilant Securities Pvt Ltd Vs DCIT (ITAT Delhi)
Disallowance Under Section 14A Cannot Exceed Exempt Income: ITAT Delhi
In the significant case of Jubilant Securities Pvt Ltd Vs DCIT, the Income Tax Appellate Tribunal (ITAT) Delhi held that disallowance under Section 14A, in relation with Rule 8D, cannot exceed the exempt income earned during a specific assessment year. The decision pivoted on the assessment of disallowed expenses and the penalty levied under Section 270A of the Income Tax Act, 1961.
The judgment brought attention to the principles laid down by numerous judicial precedents that guide the disallowance under Section 14A in line with Rule 8D. In this case, Jubilant Securities restricted the disallowance to the extent of their earned exempt income. The Assessing Officer, however, computed a larger disallowance leading to an imposition of penalty under Section 270A, alleging under-reporting of income by the assessee. The tribunal, after thorough examination of the case, determined that merely accepting the disallowance by the Assessing Officer doesn’t imply under-reporting of income. Furthermore, the tribunal emphasized that the penalty under Section 270A isn’t automatic and can’t be applied in cases where a valid and reasonable explanation exists.
The ruling by ITAT Delhi in Jubilant Securities Pvt Ltd Vs DCIT illuminates the application of Section 14A and Rule 8D in a new light. It emphasizes that disallowance can’t surpass the exempt income earned in a particular assessment year, aligning with previous judicial precedents. It also draws attention to the nuances of under-reporting of income and the conditions under which a penalty can be imposed. The verdict, hence, serves as an important precedent for future cases, reinforcing the necessity of a valid and reasonable explanation in penalty imposition.
ITAT Delhi: Penalty Under Section 270A Deleted for Assessee with Valid Explanation on Disallowance
ITAT Delhi has deleted the penalty imposed under Section 270A, stating that the assessee’s valid explanation on the disallowance made under Section 14A falls within the exception provided by Section 270A(6)(a).
Introduction: In the case of Jubilant Securities Pvt Ltd Vs DCIT, the ITAT Delhi has ruled that accepting a disallowance made by the Assessing Officer does not automatically imply under-reporting of income. The penalty imposed under Section 270A of the Income Tax Act is not automatic and certain exceptions apply. In this particular case, the ITAT found that the explanation provided by the assessee regarding the disallowance made under Section 14A was valid and reasonable.
Analysis: The ITAT considered the provisions of Section 270A(6)(a) and concluded that the assessee’s case fell within the exception. They emphasized that the penalty imposed under Section 270A in this case was unsustainable, leading to its deletion. It clarifies that the acceptance of a disallowance does not automatically imply under-reporting of income, and penalties under Section 270A must be imposed judiciously, taking into account the specific circumstances of each case.
FULL TEXT OF THE ORDER OF ITAT DELHI
This is an appeal by the assessee against order dated 26.08.2022 passed by the National Faceless Appeal Centre (NFAC), Delhi confirming the penalty imposed under Section 270A of the Income-Tax Act,1961 for an amount of Rs.77,020 for the assessment year 2017-18.
2. Briefly, the facts are, assessee is a resident corporate entity. For the assessment year under dispute, the assessee filed its return of income on 31.10.2017 declaring income of Rs.20,05,980. Subsequently, assessee filed a revised return of income on 28.08.2018 declaring income of Rs.18,11,980.
3. In course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, assessee had earned exempt income, whereas, it has disallowed expenses to the tune of Rs.27,250 under Section 14A of the Act. Being of the view that the disallowance made by the assessee is on ad hoc basis and not in accordance with Rule 8D (2), the Assessing Officer proceeded to compute disallowance in term with the said rule and computed the disallowance at Rs.5,25,762. After reducing the suo motu disallowance made by assessee, he made a net disallowance of Rs.4,98,512. The assessee accepted the disallowance without litigating further. Be that as it may, based on the aforesaid disallowance, the Assessing Officer initiated proceedings for imposition of penalty under Section 270A of the Act, alleging under reporting of income by the assessee. Ultimately, the Assessing Officer passed an order imposed penalty of Rs.77.020 under Section 270A of the Act. Though, the assessee filed an appeal challenging the imposition of penalty, however, the first appellate authority confirmed the penalty imposed.
4. Before us, learned counsel for the assessee submitted that in the year under consideration, the assessee had earned exempt income by way of dividend amounting to Rs.27,250. Therefore, the assessee restricted the disallowance under Section 14A read with Rule 8D to the extent of exempt income earned, by following the ratio laid down in various decisions rendered by Hon’ble High Courts and Tribunal. He submitted, merely because the assessee accepted the disallowance made by the Assessing Officer, it cannot lead to the conclusion that the assessee has under reported its income. Thus, he submitted, penalty imposed should be deleted.
5. Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).
6. We have considered rival submissions and perused the material on record.
7. Undisputedly, in the year under consideration, assessee has earned exempt income by way of dividend amounting to Rs.27,250. As per the ratio laid down in various judicial precedents, the disallowance under Section 14A read with Rule 8D, cannot exceed the quantum of exempt income earned during a particular assessment year. Following the settled legal position, the assessee had restricted disallowance under Section 14A to the quantum of exempt income earned during the year. Thus, in our view, there was a valid reason available to the assessee for restricting the disallowance under Section 14A of the Act to the extent of exempt income earned. Merely because assessee accepted the disallowance made by the Assessing Officer, it cannot automatically lead to the conclusion that the assessee had under reported its income. In fact, penalty under Section 270A of the Act is not automatic. Sub-section(6) of section 270A carves out exceptions where in certain instances the income assessed cannot be treated as under reported income. In the facts of the present case, in our view, assessee’s case will fall within the exception provided under section 270A(6)(a), as, the explanation offered by the assessee with regard to the disallowance made under Section 14A is a valid and reasonable explanation. Therefore, in our view, the penalty imposed under Section 270A of the Act in the facts of the present case is unsustainable. Accordingly, we delete the penalty imposed.
8. In the result, the appeal is allowed
Order pronounced in the open court on 18th May, 2023.
