2016 (1) TMI 574 - AT - Income Tax

Tribunal rules no disallowance under Section 14A without exempt income

The Tribunal upheld the CIT (A)'s decision regarding disallowance under Section 14A, emphasizing the requirement of exempt income for such disallowance. ... Disallowance u/s 14A - whether presence of exempt income is necessary for disallowance of expenditure u/s 14A? - Held that:- As far as the exemption for the years under consideration were concerned, it was an admitted factual position that the AO has not mentioned any such amount. Meaning thereby, there was no exempt income earned by the assessee for the years under consideration. In reply to one of our questions, the learned AR, Mr. K. P. Dewani has also made a statement at Bar that no dividend was declared, hence, there was no earning of exempted dividend income. He has also clarified that for the purpose of invocation of the provisions of section 14A of the IT Act, the AO has applied the formula only in respect of disallowance of proportionate interest expenditure. There was no allegation of the AO that the exempt income was earned by the assessee. Thus Section 14A will not apply if no exempt income is received or receivable during the relevant previous year as decided in Cheminvest Limited Versus Commissioner of Income Tax-VI [2015 (9) TMI 238 - DELHI HIGH COURT] - Decided in favour of assessee Issues Involved:1. Interpretation of Section 14A of the Income Tax Act - Disallowance of expenditure in the absence of exempt income.2. Application of Rule 8D for computation of disallowance under Section 14A.3. Validity of reopening the assessment under Section 147 of the Income Tax Act.Issue 1: Interpretation of Section 14A of the Income Tax Act - Disallowance of expenditure in the absence of exempt income:The Revenue Department filed appeals challenging the order of the CIT (A) regarding the disallowance of expenditure under Section 14A of the IT Act in the absence of exempt income. The AO had disallowed proportionate interest expenditure based on the provisions of Section 14A. The CIT (A) held that if no income claimed to be exempt was earned, no disallowance under Section 14A could be made. Various High Court and ITAT decisions were cited supporting this view. The Tribunal noted that there was no exempt income earned by the assessee for the years in question. The Hon'ble Delhi High Court decision in the case of Cheminvest Ltd. was referred, which clarified that Section 14A would not apply if no exempt income was received during the relevant year. Consequently, the Tribunal confirmed the CIT (A)'s findings and dismissed the Revenue's appeal on this issue.Issue 2: Application of Rule 8D for computation of disallowance under Section 14A:The Revenue argued that the formula prescribed under Rule 8D should be applied for disallowance under Section 14A regardless of whether exempt income was earned. The AO had invoked Section 14A and calculated the disallowance of proportionate interest expenditure. The Tribunal, after considering arguments from both sides and relevant court decisions, found that since no exempt income was earned by the assessee, the provisions of Section 14A did not apply. Therefore, the Tribunal dismissed the Revenue's appeal on this ground.Issue 3: Validity of reopening the assessment under Section 147 of the Income Tax Act:The Revenue raised concerns regarding the reopening of the assessment under Section 147 of the IT Act. However, since the Tribunal had already decided that the additions did not stand due to the absence of exempted income, the rest of the grounds related to disallowance of proportionate interest income and reopening of the assessment were deemed redundant. The Tribunal dismissed these grounds, stating that the main issue of invoking Section 14A without exempt income had been addressed and resolved. Consequently, the Tribunal dismissed the Revenue's appeals in their entirety.In conclusion, the Tribunal upheld the CIT (A)'s decision regarding disallowance under Section 14A, emphasizing the requirement of exempt income for such disallowance. The Tribunal also found the other grounds raised by the Revenue to be redundant and dismissed them accordingly. The appeals were ultimately dismissed by the Tribunal.