ITAT: Section 14A Disallowance Cannot Exceed Exempt Income; Ad-hoc 25% Disallowance Remanded Back

Religare Securities Ltd. filed its return for AY 2012-13 declaring a loss of Rs. 54.55 crore. In scrutiny assessment under Section 143(3), the Assessing Officer made an additional disallowance of Rs. 4.29 crore under Section 14A read with Rule 8D over and above the assessee’s suo motu disallowance, despite exempt dividend income of only Rs. 10 lakh, and an ad-hoc disallowance of Rs. 10.30 crore being 25% of payments made to its group company, Religare Enterprises Ltd., towards support services, reimbursements and rent under Section 40A(2)(b).

The CIT(A) deleted both additions, leading to Revenue’s appeal before the ITAT.

Main Issues Before ITAT: Whether disallowance under Section 14A can exceed the exempt income earned and whether the deletion of ad-hoc disallowance under Section 40A(2)(b) without examining reasonableness and fair market value was justified.

ITAT ‘s Order: The ITAT upheld deletion of the Section 14A disallowance, reiterating that disallowance under Section 14A cannot exceed the exempt income, in line with binding Delhi High Court precedents. Since the assessee’s suo motu disallowance already exceeded the exempt income, no further disallowance was permissible.

The Tribunal held that the CIT(A) erred in deleting the entire addition without examining the necessity, reasonableness, and fair market value of payments made to the related party, particularly rent and support service charges. The matter relating to the disallowance of Rs. 10.30 crore was therefore remanded to the CIT(A) for fresh adjudication after proper factual verification and affording opportunity to the assessee. The revenue’s appeal was accordingly partly allowed.

To Read Full Judgment, Download PDF Given Below