No disallowance of expenditures may be made for exempt income in accordance with Section 14A of Rule 8D of the IT Rules when calculating accounting profit: ITAT


The Income Tax Appeal Tribunal (ITAT) in Chennai has ruled that no expenditure disallowance can be made for income exempt under Section 14A of the Income Tax Act 1961 and Rule 8D of the Income Tax Rules 1962 when computing accounting profit under Section 115JB of the Income Tax Act 1961.

The only issue in this call from the assessee, M/s. Sundaram Finance Holdings Limited relates to review order passed by PCIT u/s. 263 of the Act to recalculate the disallowance of expenses relating to exempt income by invoking the provisions of s. 14A of the r/w Act Rule 8D(2) of the Income Tax Rules, 1962 for the calculation of accounting profit u/s. 115JB of the Act

The evaluation was carried out by ACIT, u/s. 143(3) of the Act, in which the issue of disallowance u/s. 14A of the Act was reviewed by the AO and it worked out the rejection at Rs. 76.91 Lakhs. Subsequently, the PCIT, on reading the profit and loss account, found from the detail of the miscellaneous expenses and the calculation of the taxable accounting profit that no amount was added to the expenses incurred to earn the exempt income.

According to the PCIT, the AO did not take into account the rejection of Rs. 76.91 Lakhs when calculating the accounting profit u/s. 115 JB of the Act and hence he issued a show cause notice to the assessee explaining why this amount of Rs. 76.91 Lakhs will not be taxed when calculating taxable accounting profit u/s. 115JB of the Act. The assessee replied that the assessee did not incur any expense related to the exempt income, as the dividend income itself was transferred as a result of the program of division approved by the National Court of Company Law.

The PCIT was not satisfied and according to the PCIT, the evaluation order passed by AO u/s. 143(3) of the Act is wrong on this point and therefore ordered the AO to calculate disallowance of expenditure of Rs. 76.91 Lakhs when calculating accounting profit u/s. 115 JB of the Law. Injured, the assessed person is appealed to the Tribunal.

The bench consisting of Mahavir Singh, Vice Chairman, and Dipak P Ripote, Accountant Member, said that “we have reviewed the facts and circumstances of the case and reviewed the entire case law and are of the opinion that the matter is covered in favor of the assessee and against Revenue that no disallowance of expenses may be made in respect of exempt income by invoking the provisions of s.14A of the Act r/w Rule 8D of the Rules when calculating accounting profit u/s 115JB of the Act.

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Ms. Sundaram Finance Holdings Limited v Asst. income tax commissioner

Counsel for the Appellant: Shri R. Vijayaraghavan

Counsel for the Respondent: Shri M. Rajan



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