2016 (12) TMI 1399 - AT - Income Tax

Tribunal rules in favor of assessee, disallows interest under section 14A

Sri T. Chandra Sekhar Rao, Vijayawada Versus Addl CIT, Range-1, Vijayawada and ACIT, Circle-1 (1), Vijayawada Versus Sri T. Chandra Sekhar Rao, Vijayawada

The tribunal ruled in favor of the assessee, directing the assessing officer to delete the disallowance of interest under section 14A of the Income Tax ... Disallowance u/s 14A - Held that:- Following the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT ), we are of the view that no disallowance can be made u/s 14A of the Act, when there is no exempt income received or receivable during the relevant assessment year. Therefore, we direct the A.O. to delete additions made towards disallowance of interest under the provisions of section 14A of the Act. - Decided in favour of assessee ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A of the Income Tax Act can be made in respect of interest/expenditure incurred for earning income which is exempt but no exempt income is received or includible in total income in the relevant assessment year. 2. Whether the revenue's appeal is maintainable in view of a retrospective CBDT circular prescribing tax-effect threshold for filing departmental appeals. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 14A when no exempt income is received or includible Legal framework: Section 14A disallows expenditure 'in relation to income which does not form part of the total income' (i.e., exempt income). The provision operates to deny deductions attributable to earning exempt income. Precedent Treatment: The Court examined competing High Court decisions. It followed the decision of the Delhi High Court in Cheminvest Ltd. v. CIT, which held that section 14A applies only where exempt income is actually includible (or received/receivable) in the relevant year; and distinguished authorities relied upon by the assessing officer (Kerala High Court decision and Maxopp Investment) as factually different. Interpretation and reasoning: The Tribunal reasoned that the language of section 14A contemplates an actual receipt/receiptability of exempt income in the relevant previous year for triggering disallowance. Where no exempt income has been earned, received or includible in the year, expenditure cannot be disallowed merely because it relates to investments capable of producing exempt income in some other year. The Tribunal rejected the assessment officer's broader view that any expenditure incurred in relation to investments that may yield exempt income at some point is automatically disallowable, noting that such an interpretation would extend section 14A beyond its text and purpose. The Tribunal also considered the distinction drawn in earlier precedent (Rajendra Prasad Moody and Holcim discussions) - observing that those decisions on allowability under other sections (e.g., section 57(iii)) do not justify reversing the textual requirement of section 14A. Ratio vs. Obiter: Ratio - section 14A disallowance cannot be made in a year in which no exempt income is received or includible in the total income; assessment officer erred in making disallowance of interest under section 14A where no exempt income arose in the year. Obiter - critical observations distinguishing other High Court decisions and discussion of Supreme Court authority in different statutory contexts (e.g., section 57(iii)) used to explain limits of their applicability. Conclusion: The Court deleted the disallowance under section 14A of the Act in respect of interest paid on loans taken to invest in sister concerns, because no exempt income was received or includible in the relevant assessment year. Issue 2 - Maintainability of revenue appeal in view of CBDT circular on tax-effect threshold Legal framework: Administrative instruction (CBDT circular) prescribing criteria for departmental appeals based on tax-effect threshold (retrospective operation noted by the parties). Precedent Treatment: The Tribunal applied the circular (CBDT Circular No.21/2015 dated 10.12.2015) as applicable to the appeal taken up, observing the counsel's representation that the tax effect is below the prescribed limit; the Departmental Representative did not contest maintainability. Interpretation and reasoning: Given the circular's retrospective applicability and the admitted tax-effect falling below the threshold, the Tribunal concluded the departmental appeal was not maintainable. There was no contest from the revenue's representative on this point; accordingly no merits-based adjudication was required. Ratio vs. Obiter: Ratio - where a departmental appeal falls below the tax-effect threshold set by an applicable CBDT circular and the circular is retrospective in operation, the appeal is not maintainable. Obiter - none required; the decision rests on application of the circular and absence of departmental challenge. Conclusion: The Tribunal dismissed the revenue's appeal for want of maintainability under the CBDT circular. Cross-references 1. Issue 1 and Issue 2 are discrete: the rule on section 14A addresses substantive disallowance; the CBDT circular threshold governs procedural maintainability of departmental appeals (Issue 2 resulted in dismissal without reaching substantive merits where applicable). 2. The Tribunal explicitly followed Cheminvest Ltd. (Delhi High Court) on Issue 1 and distinguished other authorities cited by the assessing officer as factually inapposite.