ITAT decision: Disallowance under section 14A restricted to extent of exempt income

The ITAT allowed the appeal for the assessment year 2012-13 and partly allowed the appeal for 2013-14, directing the AO to delete the disallowance u/s 14A when no exempt income is earned and to restrict disallowance to the extent of exempt income earned.

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Issues:
- Disallowance under section 14A of the Income Tax Act for assessment years 2012-13 and 2013-14.
- Whether disallowance of expenditure u/s 14A is applicable when no exempt income is earned.
- Limitation on disallowance u/s 14A concerning the amount of exempt income earned.

Analysis:
1. The appeals were filed against orders of the CIT(A) for the assessment years 2012-13 and 2013-14, concerning disallowance under section 14A. The appeals were heard together due to identical facts and issues.

2. The assessee contested the disallowance of expenses under section 14A for strategic investments in associate and group companies. The CIT(A) upheld the AO's disallowance, citing judicial precedents. The assessee argued no exempt income was earned, hence no disallowance should apply.

3. The ITAT considered whether disallowance u/s 14A is justified without exempt income. Referring to a similar case, it was held that if no exempt income is earned, no disallowance is warranted. The decision of the Delhi High Court was crucial in this determination.

4. For the assessment year 2013-14, where some exempt income was earned, the disallowance was limited to the amount of exempt income. The ITAT relied on previous decisions and the Delhi High Court's stance on the proportionality of disallowance to exempt income.

5. Ultimately, the ITAT allowed the appeal for the assessment year 2012-13 and partly allowed the appeal for 2013-14, directing the AO to delete the disallowance u/s 14A when no exempt income is earned and to restrict disallowance to the extent of exempt income earned. The judgment was pronounced on November 8, 2017.

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