income tax

Understanding ITAT Ruling on Section 14A Disallowance in Century Real Estate Case

Introduction

This blog discusses the ITAT Bangalore case of Century Real Estate Holdings Pvt. Ltd. vs. ACIT, focusing on the issue of whether disallowance under section 14A can exceed the amount of exempt income. The judgment highlights critical interpretations of tax regulations, specifically emphasizing limits on disallowance in relation to exempt income.

Background of the Case

The appeal filed by the assessee concerns assessment year 2014-15 against the order dated February 11, 2020, by Ld. CIT(A)-11, Bengaluru. The grounds raised by the assessee contest the disallowance made under section 14A:

  1. The learned CIT(A) erred in their order's execution.
  2. The confirmation of additions by the learned CIT(A) was incorrect, as it disregarded the appellant's submissions.
  3. The learned CIT(A) unjustly upheld additions made by the Assessing Officer (AO) under section 14A, read with Rule 8D of the Act.
  4. The learned CIT(A) did not record dissatisfaction prior to applying section 14A, read with Rule 8D.
  5. No expenditure was incurred justifying section 14A since most investments were inherited from previous years.
  6. The learned CIT(A) overlooked that the appellant had sufficient own funds, making disallowance under section 14A unwarranted.
  7. The disallowance exceeded the actual exempt income.
  8. The disallowance was seen as excessive and arbitrary and should be eliminated.
  9. Various other grounds may be presented during the appeal hearing.

Facts of the Case

The assessee, a real estate developer, reported the following exempt income during the relevant assessment year:

  • Share of profit from a partnership firm: ₹1,02,01,474
  • Dividend from mutual funds: ₹2,04,183
  • Total exempt income: ₹1,04,05,657

Despite this, the assessee did not disallow any amount under section 14A. The AO identified a disallowance of ₹20,92,40,552 per Rule 8D calculations. Consequently, a show-cause notice was issued to the assessee regarding disallowance under section 14A. The assessee argued that no expense was incurred to generate exempt income, most investments being carried forward, and that the total disallowance should only be ₹7,54,468.

Assessment Findings

The AO refuted the claims and computed a disallowance of ₹19.95 crores, which included ₹18.65 crores as interest disallowance under Rule 8D(2)(ii) and ₹1.28 crores for administrative expenses under Rule 8D(2)(iii). This disallowance was integrated into the overall assessment.

During the appellate proceedings, the assessee insisted that the AO had not recorded necessary dissatisfaction before invoking Rule 8D. Furthermore, it was argued that only exempt-yielding investments should be considered and that disallowance should align with exempt income.

Judgement Overview

The Ld. CIT(A) dismissed the assessee's contentions, asserting the AO's examination of accounts justified dissatisfaction. Citing CBDT Circular No.5/2014 dated February 11, 2014, which states tax disallowance could occur regardless of actual exempt income, the CIT(A) affirmed the AO's disallowance.

Upon review of various arguments and evidence, the ITAT concluded:

  • Ground nos. 1, 2, 3, 5, 8, and 9 were general and not directly related to disallowance.
  • Ground no. 4, regarding non-recording of dissatisfaction, was disproven, as sufficient evidence by the AO was presented regarding the lack of disallowance made by the assessee.
  • For ground no. 6, the claim of ample own funds did not hold, as exempt income from partnerships should factor into investment evaluations.

Main Rulings

The ITAT emphasized that:

  • The share income from partnership firms remains exempt under section 10(2A). Therefore, the provisions under section 14A apply.
  • The disallowance under section 14A should not exceed the actual amount of exempt income, supported by prior rulings from the Delhi High Court and ITAT.

Conclusion

The ITAT directed the AO to ensure that disallowances under section 14A remain capped at the level of exempt income. The appeal was partly allowed, confirming essential principles regarding the limitations of disallowances tied to exempt incomes, reinforcing taxpayer rights under the Income Tax Act.

The stay petition associated with the appeal became without merit due to the judgment disposition. The order was pronounced in open court on June 24, 2020.