ITAT Raipur: No Disallowance under Section 14A

Shree Nakoda Industries Ltd. Versus Dy. Commissioner of Income Tax, Circle – 1 (2), Raipur

Shree Nakoda Industries Ltd. Versus Dy. Commissioner of Income Tax, Circle – 1 (2), Raipur - TMI Issues:
Disallowance of expenses under section 14A r.w.r. 8D for A.Y. 2012-13.

Analysis:

1. The appeal filed by the assessee challenges the order of the Commissioner of Income-Tax (A)-I, Raipur for the assessment year 2012-13. The assessee, a company engaged in trading iron and steel products, declared a total income of Rs. 86,43,670. The assessment under section 143(3) resulted in a total income of Rs. 1,26,60,910, leading to a disallowance of Rs. 40,17,237 on account of inadmissible expenses under section 14A r.w.r. 8D. The CIT(A) upheld the disallowance, prompting the current appeal before the ITAT Raipur.

2. The crux of the issue lies in the applicability of section 14A, which disallows expenses in relation to income not forming part of the total income. The assessee contended that no exempt income was earned during the year, thus challenging the disallowance. The CIT(A) upheld the disallowance, emphasizing that the section does not require the exempt income to be earned during the relevant financial year. The CIT(A) also rejected the claim that the investments were made for business expediency, stating that section 14A does not differentiate between investments made for business reasons or otherwise.

3. During the ITAT hearing, the assessee reiterated that since no exempt income was earned, no disallowance under section 14A should apply. The assessee argued that the interest-free funds available in the form of Share Capital and Reserves and Surplus exceeded the investments, warranting no disallowance of interest. The Departmental Representative supported the lower authorities' orders, emphasizing the lack of proof regarding the source of funds used for investments.

4. The ITAT, after considering the submissions and precedents, noted that when no claim for exempt income exists, section 14A does not apply. Citing judgments by various High Courts, including Gujarat and Delhi, the ITAT emphasized that where no exempt income was earned, disallowance under section 14A was unwarranted. Referring to the Balance Sheet, the ITAT observed that the availability of interest-free funds exceeded the investments, aligning with the principle established in previous judgments.

5. Noting the absence of contrary binding decisions or challenges to the cited precedents, the ITAT concluded that no disallowance under section 14A was justified in the current case. Consequently, the ITAT allowed the grounds of appeal raised by the assessee, resulting in the appeal being allowed in favor of the assessee.

In conclusion, the ITAT Raipur ruled in favor of the assessee, holding that no disallowance under section 14A was warranted due to the absence of any exempt income earned during the year and the availability of interest-free funds exceeding the investments, aligning with established legal precedents.