Kuntal Hasmukhlal Shah Vs ACIT (ITAT Mumbai)
Section 14A Cannot Disallow Expenditure Never Claimed: ITAT Mumbai Deletes Entire Disallowance
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted a disallowance of ₹13.76 lakh made under section 14A read with Rule 8D for AY 2017–18, holding that expenditure not claimed as a deduction in the return of income cannot be disallowed.
In this case, the assessee had earned exempt income by way of dividend income and long-term capital gains exempt under section 10(38) but had not made any suo motu disallowance under section 14A. During assessment, the Assessing Officer mechanically applied Rule 8D and restricted the disallowance to the total expenditure of ₹13.76 lakh, which included ₹7.92 lakh directly debited to the capital account and never claimed as deductible, and ₹5.84 lakh claimed against taxable consultancy income.
The Tribunal held that section 14A operates only where expenditure is actually claimed as a deduction and there must be a clear finding of nexus between the expenditure claimed and the earning of exempt income. It noted that neither the AO nor the CIT(A) recorded proper satisfaction as mandated under section 14A(2), nor demonstrated how the expenses—whether capitalised or claimed against taxable income—were incurred in relation to exempt income.
Relying on CIT v. Hero Cycles Ltd. (SC) and ACIT v. Vireet Investment Pvt. Ltd. (Special Bench), the ITAT ruled that Rule 8D cannot be invoked mechanically and that expenditure never claimed in the computation of income cannot be the subject of disallowance. Consequently, the entire disallowance of ₹13.76 lakh was deleted and the assessee’s appeal was allowed
FULL TEXT OF THE ORDER OF ITAT MUMBAI
