2016 (2) TMI 677 - AT - Income Tax

Tribunal overturns disallowance under Income Tax Act, no exempt income received.

The Tribunal allowed the appeal filed by the assessee company, deleting the disallowance made under section 14A of the Income Tax Act. The Tribunal held ... Disallowance u/s 14A - Held that:- We have observed that the assessee company has own funds of around ₹ 40.79 crores as at 31-03-2010 which comprises share capital and reserves as per balance sheet filed in the paper book. We have also perused the copy of balance sheet as well as the P&L account where it is clear that the assessee company has earned no dividend income during the previous year relevant to the assessment year and in view in the case of Cheminvest Ltd.(2015 (9) TMI 238 - DELHI HIGH COURT ) the ratio laid down therein is squarely applicable to the present case of the assessee company wherein held that the expression ‘does not form part of the total income’ in section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Thus disallowance deleted - Decided in favour of assessee Issues:1. Disallowance under section 14A of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Disallowance under section 14A of the Income Tax Act, 1961The appeal was filed by the assessee company against the order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2010-11. The assessee contested the disallowance of expenditure amounting to Rs. 302,500 under section 14A of the Act. The company argued that no direct or indirect expenses were incurred for earning exempt income during the year. The Assessing Officer (AO) observed that the company had made investments in shares, the income from which did not form part of the total income, and thus, disallowed the expenditure under Rule 8D of the Income Tax Rules, 1962. The AO applied Rule 8D(2)(iii) and disallowed 0.5% of the average investments held by the company. The Commissioner (Appeals) upheld the AO's decision, stating that all expenses related to exempt income had to be disallowed under section 14A, regardless of their nature.The company contended that it had invested in group companies using its own funds and reserves, without incurring any borrowed funds or interest costs. The company presented its balance sheet and profit and loss account to support its claim. The company argued that no expenditure was incurred during the financial year to earn exempt income. The company relied on legal precedents such as the decision of the Delhi High Court in Cheminvest Ltd. v. CIT and the Bombay High Court in CIT v. HDFC Bank Limited to support its case. The Departmental Representative (D.R.) supported the AO's decision, emphasizing the application of Rule 8D for disallowance under section 14A.The Tribunal analyzed the facts and observed that the company had substantial own funds and had not received any dividend income during the relevant year. Citing the decision of the Delhi High Court, the Tribunal concluded that section 14A would not apply if no exempt income was received or receivable during the relevant year. Therefore, the Tribunal held that the disallowance made by the AO and upheld by the Commissioner (Appeals) was incorrect. The Tribunal allowed the appeal filed by the assessee company, deleting the disallowance made by the AO and the Commissioner (Appeals).In conclusion, the Tribunal ruled in favor of the assessee company, emphasizing that no disallowance under section 14A was warranted as no exempt income was received during the relevant year. The Tribunal's decision overturned the orders of the AO and the Commissioner (Appeals), providing relief to the assessee company.