2014 (5) TMI 12 - HC - Income Tax

Court rules Section 14A doesn't apply to Chapter VIA deductions, upholds Tribunal decision.

COMMISSIONER OF INCOME TAX AHMEDABAD IV Versus BANASKANTHA DIST. CO. OP. MILK PRODUCERS' UNION LTD.

The court ruled in favor of the assessee, confirming that Section 14A of the Income Tax Act does not apply to deductions claimed under Chapter VIA ... Applicability of section 14A of the Act - Whether section 14A would apply to provision of Chapter VIA – Held that:- Following Commissioner of Income-tax Versus Kribhco [2012 (7) TMI 591 - DELHI HIGH COURT] Section 14A operates in respect of the income not forming part of the total income - Chapter VIA while computing the total income of the assessee from his gross total income in accordance with and subject to the provision of this chapter, the deductions specified are permissible - the taxable income of the assessee would surely get reduced and yet there is marked difference between the exempted income and the deduction provided under Chapter VIA - the investment in shares made by the assessee which earned him the dividend was from his own income - Section 14A would have no application in respect of the income not being taxable on account of deduction u/s 80P(2)(d) - Both the authorities have rightly held that there is no application of section 14A as far as the deduction under section 80A to 80U under Chapter VIA of the Act are concerned. The income which qualifies for deductions u/s 80C to 80U has to be first included in the total income of the assessee - deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions - This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income - They form part of the total income but are allowed as a deduction and reduced – Decided against Revenue. Issues Involved:1. Applicability of Section 14A read with Rule 8D of the Income Tax Act to income not chargeable to tax under Chapter VIA (Sections 80A to 80U) of the Income Tax Act.2. Interpretation of the phrase 'income which does not form part of total income under this Act' in Section 14A.3. Confirmation of CIT(A)'s deletion of the addition made by the assessing officer under Section 14A.Issue-wise Detailed Analysis:1. Applicability of Section 14A read with Rule 8D to Income under Chapter VIA:The primary issue concerns whether Section 14A, which disallows expenses related to income not forming part of the total income, applies to deductions claimed under Chapter VIA (Sections 80A to 80U). The court scrutinized the material on record and noted that the Tribunal had relied on the decision of ITAT Chennai Bench in Tamil Nadu Silk Producers Federation Ltd., which held that Section 14A does not apply to Chapter VIA deductions. The Tribunal observed that Chapter VIA deductions are made in computing total income and are not comparable to exempt income under Chapter III.2. Interpretation of 'Income which does not form part of total income under this Act' in Section 14A:The court examined Section 14A, which specifies that no deduction shall be allowed for expenses related to income not forming part of the total income. It was noted that Chapter VIA deductions reduce taxable income but do not exclude the income from total income computation. The court emphasized that Chapter VIA deductions are distinct from exempt income under Chapter III and that Section 14A does not reference deductions under Chapter VIA.3. Confirmation of CIT(A)'s Deletion of Addition:The Tribunal upheld CIT(A)'s deletion of the addition made under Section 14A, affirming that the assessee's investments were from its own funds and that the assessee had not claimed any part of its income as exempt. The Tribunal concluded that Section 14A was wrongly invoked by the assessing officer. The court agreed with this conclusion, noting that both CIT(A) and the Tribunal correctly interpreted the law.Conclusion:The court followed the Delhi High Court's decision in Commissioner of Income-Tax vs. Kribhco, which held that Section 14A does not apply to deductions under Chapter VIA. The court affirmed that Chapter VIA deductions are part of the total income computation and do not transform the income into exempt income. The appeal was disposed of in favor of the assessee, confirming that Section 14A does not apply to Chapter VIA deductions.