Business expenditure – Disallowance of expenditure relating to exempted income – Section 14A of ITA, 1961 – Disallowance cannot exceed exempt income earned – Tribunal restricting disallowance to extent offered by assessee – Proper

2. Principal CIT vs. HSBC Invest Direct (India) Ltd.

[2020] 421 ITR 125 (Bom.)

Date of order: 4^th
February, 2019

A.Y.: 2009-10

Business
expenditure – Disallowance of expenditure relating to exempted income – Section
14A of ITA, 1961 – Disallowance cannot exceed exempt income earned – Tribunal
restricting disallowance to extent offered by assessee – Proper

The assessee
is a limited company. In the return of income filed for the A.Y. 2009-10, the
question of making disallowance to the expenditure claimed by the assessee in
terms of section 14A of the Income-tax Act, 1961 read with Rule 8D of the
Income-tax Rules, 1962 came up for consideration. During the assessment in the
appellate proceedings, the assessee offered restricted disallowance of Rs. 1.30
crores. The Department contended firstly that the statutory auditors in the
report had made a disallowance of Rs. 2.53 crores u/s 14A of the Income-tax
Act, 1961, and secondly that in view of the assessee’s income which was exempt,
the disallowance had to be made under Rule 8D of the Income-tax Rules, 1962.
The Tribunal accepted the assessee’s voluntary offer of disallowance of
expenditure.

The Revenue filed an appeal
against the judgment of the Income-tax Appellate Tribunal, raising the
following question for consideration:

‘(i) Whether the order of the
Tribunal is perverse in law as it ignored the disallowance computed by the
auditors of the assessee which was in accordance with section 14A of the
Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962?’

The Bombay High Court upheld the
decision of the Tribunal and held as under:

‘i) The disallowance of expenditure incurred to earn the exempt
income could not exceed the exempt income earned. The ratio of the decisions in
the cases of Cheminvest Ltd. vs. CIT [2015] 378 ITR 33 (Delhi) and
CIT vs. Holcim India (P) Ltd. (I.T.A. No. 486 of 2014 decided on 5^th
September, 2014) would include a facet where the assessee’s exempt
income was not nil, but had earned exempt income which was more than the
expenditure incurred by the assessee in order to earn such income.