2017 (4) TMI 298 - HC - Income Tax

Disallowance under s.14A and Rule 8D invalid when no exempt dividend included in assessee's taxable income

HC held that the Assessing Officer's disallowance under s.14A and reliance on Rule 8D was impermissible where no exempt income (dividend) formed part of ... Disallowance u/s 14A - as per Revenue he could disallow the expenditure even there is no income i.e., dividend by taking recourse to Rule 8D - Held that:- In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act. - Decided in favour of assessee Issues Involved:- Validity of addition made under Section 14 A of the Income Tax Act, 1961 read with Rule 8 D of the Income Tax Rules, 1962.Analysis:1. The appeal was filed against the Income Tax Appellate Tribunal's order regarding the validity of an addition made under Section 14 A of the Income Tax Act. The Assessing Officer had disallowed expenditure under Section 14 A by adding a specific amount to the Assessee's income.2. The Commissioner of Income Tax (Appeals) reversed the Assessing Officer's determination, leading to the Revenue's appeal to the Tribunal. The Tribunal remanded the matter to the Assessing Officer to verify if the Assessee's investments in sister concerns were made from interest-free funds for strategic purposes.3. The High Court noted that the Assessee did not earn any dividend income that was exempt from tax in the relevant assessment year. Section 14 A of the Act can only be invoked when the Assessee seeks to offset expenditure against income not forming part of the total income under the Act.4. The Court emphasized that Rule 8 D cannot go beyond what is provided in Section 14 A of the Act. A similar argument by the Revenue in another case was rejected by a Co-ordinate Bench, which held that Section 14 A cannot be applied where no exempt income is earned in the previous year relevant to the assessment year in question.5. The Court further clarified that the computation of total income is based on real income, not notional or anticipated income. Rule 8D cannot be interpreted to extend beyond the scope of Section 14 A. The Tribunal's decision to remand the matter was upheld, and the appeal was dismissed with no costs.6. The judgment provided a detailed analysis of the legal provisions and precedents, emphasizing the correct interpretation and application of Section 14 A and Rule 8D in determining the validity of disallowing expenditure in cases where no exempt income is earned.