By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants
fiogf49gjkf0d
Disallowance of expenditure u/s. 14A cannot exceed the exempt income earned.
Facts:
The assessee earned exempt income amounting to Rs. 68,37,583 against which the assessee voluntarily disallowed the expenses of the investment division on pro rata basis amounting to Rs. 26,646. However, the Assessing Officer applied the provisions of Rule 8D and added Rs. 2,16,51,917 representing the excess of the expenses disallowable as per Rule 8D over the expenses already disallowed by the assessee. While doing so, the Assessing Officer also disallowed the proportionate interest expenditure rejecting the claim of the assessee that it had sufficient interest-free funds in the nature of share capital and reserves. The CIT (A) also upheld the said disallowance and revised it upward marginally to Rs. 2,19,47,772.
Held:
If the method of Rule 8D is applied mechanically, it leads to manifestly absurd results in as much as for tax-free income of Rs. 68,37,583, disallowance of Rs. 2,16,51,917 [enhanced by CIT(A) at Rs. 2,19,47,772] is made u/s. 14A which exceeds the exempt income. The interpretation of provisions of section 14A r/w Rule 8D is leading to unanticipated absurdities which cannot be the intention of legislature. Under these circumstances, help of external aids of construction for interpretations of statute is called for. Looking at the varying interpretation offered by various courts and benches of tribunal in relation to section 14A, it is difficult to precisely decide the issue. The Tribunal followed the decision of Chandigarh Tribunal in the case of Punjab State Co-op & Marketing Federation Ltd. [ITA No. 548/Chd/2011] and held that disallowance u/s. 14A cannot exceed tax free income. A holistic view is required to be taken that disallowance in terms of section 14A can be maximum to the extent of exempt income which is Rs. 68,37,583 in this case. It implies that reasonable expenditure less than the exempt income can be disallowed. Therefore, in the interest of justice it was held that it will be reasonable to estimate and disallow, 50% of exempt income as relatable to exempt income u/s. 14A r/w Rule 8D.
