Tribunal rules Section 14A doesn't apply without exempt income. Warranty provision disallowed, re-computation appeal dismissed.

Priya Ltd. Versus DCIT (OSD), Circle-2 (3), Mumbai and Vice-Versa

Priya Ltd. Versus DCIT (OSD), Circle-2 (3), Mumbai and Vice-Versa - TMI Issues Involved:
1. Applicability of Section 14A of the Income Tax Act, 1961.
2. Disallowance of provision for warranty.
3. Re-computation of disallowance under Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Applicability of Section 14A of the Income Tax Act, 1961:
The primary issue was whether the provisions of Section 14A of the Income Tax Act, 1961, apply to the assessee despite no exempt income being earned during the year. The assessee argued that no expenditure was incurred to earn exempt income and relied on a previous Tribunal decision (ITA No.5671/Mum/2011) for Assessment Year 2008-09. The Revenue, while defending the addition/disallowance, did not provide contrary facts. The Tribunal considered the decision of the Hon'ble Delhi High Court in Chem Invest Ltd. vs CIT (2015) 378 ITR 33 (Del.), which held that Section 14A does not apply if no exempt income is received or receivable during the relevant Assessment Year. The Tribunal found that the assessee's case was similar and decided in favor of the assessee, following the principle that Section 14A will not apply if no exempt income is earned during the relevant year.

2. Disallowance of Provision for Warranty:
The second issue was the confirmation of the disallowance of the provision for warranty amounting to Rs. 3,06,365/- against the correct disallowance of Rs. 34,029/-. The Revenue pointed out that this issue was already covered against the assessee by the Tribunal's decision for Assessment Year 2005-06 (ITA No.8725/Mum/2010). The Tribunal noted that the provision for warranty was disallowed because it was considered a contingent liability. The Tribunal cited the Supreme Court's decision in Rotork Controls India Pvt. Ltd. (314 ITR 62), which requires a fair, scientific, and reasonable basis for such provisions. The Tribunal upheld the disallowance but directed the Assessing Officer to quantify the correct disallowance.

3. Re-computation of Disallowance under Section 14A read with Rule 8D:
The third issue involved the Revenue's appeal against the direction to recompute the disallowance under Section 14A read with Rule 8D after excluding long-term capital investment in subsidiary/group concerns. The Tribunal upheld the Ld. Commissioner of Income Tax (Appeal)'s decision, which relied on the Tribunal's decision in Garware Wall Roaps Ltd. (65 SOT 86). The Tribunal dismissed the Revenue's appeal, noting that the issue was currently in favor of the assessee, although it acknowledged that the order of the Hon'ble High Court would be binding on both parties.

Conclusion:
The Tribunal allowed the appeal of the assessee regarding the non-applicability of Section 14A in the absence of exempt income and upheld the disallowance of the provision for warranty, directing the correct quantification. The Tribunal dismissed the Revenue's appeal on the re-computation of disallowance under Section 14A read with Rule 8D. The Tribunal's decisions were pronounced in the open court on 13/02/2017.