Restriction of disallowance by CIT(A) made by AO held justified by ITAT.

Facts in Brief:

1. Assessee Company, which is engaged in the business of infrastructure development.

2. It filed its return of income for the A.Y. 2010-2011 M/s. Divyasree NSL Infrastructure P. Ltd., Raidurga (V), Serilingampally (M), Hyderabad. at Rs.'NIL'.

3. AO observed that the assessee has not made any disallowance under section 14A (of Income Tax Act, 1961) in this count.

4. He further observed that the assessee had initially worked out the disallowance under section 14A (of Income Tax Act, 1961) at Rs.1.41 crores during the assessment proceedings and subsequently, the same was revised and worked out to Rs.27 lakhs.

5. In assessment A.O. observed that the interest rate on the debentures was @ 10% and as there is a direct nexus between the investment in the mutual funds of Rs.22,61,29,005 out of the debentures proceeds, the disallowance under section 14A (of Income Tax Act, 1961) is called for. Thus, he worked out the disallowance under Rule 8D (of Income Tax Rules, 1962) of the I.T. Act. He, accordingly, made disallowance of Rs.2,36,09,230 under section 14A (of Income Tax Act, 1961) and brought it to tax.

6. On appeal CIT(A) restricted the disallowance at Rs.21,23,250 as against the disallowance of Rs.2,36,09,230 made by the A.O.

On appeal ITAT held,

7. We find that section 14A (of Income Tax Act, 1961) ITA.No.657/Hyd/2015 M/s. Divyasree NSL Infrastructure P. Ltd., Raidurga (V), Serilingampally (M), Hyderabad. provides that, for the purpose of computing the total income under Chapter-4 of the I.T. Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act.

8. Thus, it is clear that the assessee should have earned income which is not forming part of the total income under the provisions of the Income Tax Act to disallow expenditure incurred by the assessee for earning of such income.

9. In the case before us, undoubtedly, the assessee has earned dividend income from mutual funds which is not chargeable to income tax. If the assessee had claimed the dividend income as exempt from tax, then the assessee would have to make a disallowance under section 14A (of Income Tax Act, 1961) the expenditure relatable to earning of such income and on failure of the assessee to do so, the A.O. would have to make such disallowance under section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962) of the I.T. Act.

10. In the case before us, it is the contention of the assessee that it has not claimed the dividend income as exempt from tax, but has set it off against the interest payable and hence, there is no cause for making any disallowance under section 14A (of Income Tax Act, 1961). The Ld. CIT(A) has appreciated the contentions of the assessee and on verification, found that the assessee has not claimed the dividend income as exempt from tax and in such circumstances, the disallowance under section 14A (of Income Tax Act, 1961) is not called for.

11. However, taking into consideration the ITA.No.657/Hyd/2015 M/s. Divyasree NSL Infrastructure P. Ltd., Raidurga (V), Serilingampally (M), Hyderabad. fact that the assessee itself has worked out the disallowance at Rs.21,23,250, the Ld. CIT(A) has restricted the disallowance to such an amount. The Ld. D.R. has not been able to rebut this finding of the CIT(A) with any evidence to the contrary. In view of the same, we do not see any reason to interfere with the order of the Ld. CIT(A).

12. In the result, appeal of the Revenue is dismissed.

Case Reference - Divyasree Nsl Infrastructure Pvt ... vs Department Of Income Tax.