2017 (1) TMI 941 - AT - Income Tax

Tribunal Rules No Disallowance under Section 14A of Income Tax Act

The Tribunal held that no disallowance under section 14A of the Income Tax Act was warranted as the assessee did not earn any exempt income, aligning with ... Disallowance made u/s 14A read with Rule 8D - as the assessee made the investment in equity shares - Held that:- at the stage of enquiry u/s 14A, the Assessing Officer is free to independently consider the matter for admissibility of interest on borrowings and its extent. In the present appeal, we note that no exempt income was earned by the assessee from the strategic investment made in group companies, therefore, no disallowance was required to be made u/s 14A of the Act. The expression “does not form part of the total income” in section 14A of the Act, envisage 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 income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Since, no exempt income was earned by the assessee and since the genuineness of the expenditure, incurred by the assessee, was not in doubt, no disallowance could be made u/s 14A of the Act. - Decided in favour of assessee Issues:Disallowance of expenditure under section 14A of the Income Tax Act, 1961.Analysis:The Revenue challenged the order of the Ld. First Appellate Authority, Mumbai, which deleted the disallowance of Rs. 1,54,33,285 made under section 14A of the Act concerning the investment in equity shares by the assessee. The Revenue argued that as the assessee had controlling interest in the company, the order should be reversed based on a decision from the Hon'ble Karnataka High Court. On the other hand, the assessee contended that no exempt income was earned, citing decisions from the Hon'ble Delhi High Court and the Tribunal. The Ld. Commissioner of Income Tax (Appeal) had deleted the disallowance considering various High Court decisions, leading to the Revenue's appeal before the Tribunal.Upon analysis, the Tribunal found that the case of the assessee aligned with decisions from various High Courts. It was established that section 14A only allows disallowance of expenditure related to tax-exempt income and does not encompass the entire exempt income. The Tribunal referred to judgments from the Hon'ble Delhi High Court and the Hon'ble Punjab & Haryana High Court to support this interpretation. The Tribunal also highlighted that section 14A does not apply if no exempt income is received during the relevant year, as per the Hon'ble Delhi High Court's decision in 'M/s Cheminvest Ltd. vs. CIT.'Moreover, the Tribunal referred to similar issues addressed by the Hon'ble Allahabad High Court, the Hon'ble Gujarat High Court, and the Hon'ble Bombay High Court to emphasize the consistent interpretation of section 14A across different jurisdictions. The Tribunal dismissed the Revenue's appeal, concluding that since no exempt income was earned by the assessee and the expenditure's genuineness was not in doubt, no disallowance under section 14A was warranted. The Tribunal relied on previous decisions and the stand taken by the Tribunal, in line with judgments from the jurisdictional High Courts, to support its decision to uphold the Ld. Commissioner of Income Tax (Appeal)'s order.In a separate judgment, the Hon'ble Karnataka High Court addressed the applicability of section 14A to expenses incurred for acquiring shares. The Court upheld the applicability of section 14A but directed the Assessing Officer to determine the extent to which interest-bearing borrowings were used for acquiring shares, emphasizing the need for a factual examination. The Court dismissed the appeal, highlighting that the Assessing Officer's discretion in assessing the admissibility of deductions under section 14A should be maintained, especially when no substantial question of law arises.In conclusion, the Tribunal and the Hon'ble Karnataka High Court provided detailed analyses regarding the application of section 14A, emphasizing the need for a factual assessment and the absence of exempt income to warrant disallowance under the Act.