ITAT: Rs. 20.50 Lakh Section 14A Disallowance Held Excessive Against Rs. 8 Lakh Dividend Income

ITAT Mumbai has provided significant relief to Mahindra Lifespace Developers Ltd by reducing a disallowance made under Section 14A of the Income Tax Act for the assessment year 2005-06.

The dispute arose from an assessment in which the tax department disallowed certain expenses claimed by the company on the ground that they related to earning exempt income. During the year, Mahindra Lifespace earned exempt dividend income of Rs 8 lakh.

Initially, the Assessing Officer (AO) made a disallowance of Rs 255.29 lakh under Section 14A. The matter went through various rounds of appeals and was finally reviewed after directions from the ITAT.

On review the CIT(A) upheld an indirect expense disallowance of Rs.20.50 lakhs calculated at 0.5% of average investments. The assessee challenged this disallowance by filing a further appeal before the ITAT.

The ITAT noted that the assessee earned only Rs 8 lakh of exempt dividend income whereas the disallowance sustained by the CIT(A) was Rs 20.50 lakh which was excessive and unjustified. As Rule 8D was not applicable for the assessment year, the Tribunal directed the assessing officer to restrict the disallowance to 10% of the exempt income and deleted the balance amount. It also held that this estimated disallowance should not be added to book profits for MAT purposes following the decision in Vireet Investments Pvt Ltd. Accordingly, the appeal of the assessee was partly allowed.