2016 (2) TMI 1213 - AT - Income Tax

Tribunal rules disallowance under section 14A not justified without exempt income

The Tribunal allowed the appeals of the assessees and dismissed the revenue's appeals, ruling that disallowance under section 14A is not justified in the ... Disallowance u/s 14A r.w. Rule 8D - sufficiency of own funds - Held that:- We find it is not in dispute that assessee has not earned any dividend income or any kind of exempt income from the investments made. The Hon’ble Delhi High Court in the case of Cheminvest Ltd [2015 (9) TMI 238 - DELHI HIGH COURT] after discussing the entire law on this point including the decision of Hon’ble Supreme Court in the case of CIT vs Rajendra Prasad Moody [1978 (10) TMI 133 - SUPREME COURT]. Thus we hold that, no disallowance u/s 14A is called for, once there is no exempt income received or receivable by the assessee during the relevant previous year. Accordingly, the ground raised by the assessee is treated as allowed. Issues:Cross appeals filed by different assessees and the revenue against impugned orders regarding disallowance under section 14A r.w. Rule 8D for the assessment year 2008-09.Analysis:The Appellate Tribunal considered cross appeals by two different assessees and the revenue against impugned orders concerning disallowance under section 14A r.w. Rule 8D for the assessment year 2008-09. The appeals were disposed of together due to common issues arising from identical facts. The AO had made disallowances in both cases based on interest and indirect expenditures. The CIT(A) directed adjustments in interest expenditure but confirmed disallowance of indirect expenditure.In arguments, the appellant contended that as no exempt income was earned, disallowance under section 14A was not applicable, citing a Delhi High Court decision. Conversely, the DR referred to a Board Circular and an ITAT decision to support disallowance even in the absence of exempt income. Upon review, the Tribunal noted the absence of dividend or exempt income and referenced the Delhi High Court's interpretation of Sec. 57(iii) emphasizing the purpose of expenditure for income, leading to the conclusion that no disallowance was warranted without exempt income.The Tribunal differentiated between Sec. 57(iii) and Section 14A, emphasizing that the purpose of expenditure for earning income is crucial for deduction under Sec. 57(iii). It highlighted a previous ITAT decision's inapplicability due to the absence of exempt income. Relying on the Delhi High Court's ruling, the Tribunal held that disallowance under section 14A is unnecessary without exempt income. Consequently, the appeals of the assessees were allowed, and those of the revenue were dismissed.In conclusion, the Tribunal allowed the appeals of the assessees and dismissed the revenue's appeals, affirming that disallowance under section 14A is not warranted in the absence of exempt income. The orders were pronounced on 15th February 2016.