2017 (4) TMI 1095 - AT - Income Tax

Tribunal Upholds No Disallowance Without Income Rule: Revenue Appeals Admitted

The Assistant Commissioner of Income Tax, Non-Corporate Circle – 15 (1), Chennai Versus M/s South Asia FM Ltd.

The Tribunal upheld the order of the lower authority, confirming that no disallowance should be made under Section 14A of the Income-tax Act, 1961 if no ... Disallowance u/s 14A - Held that:- In view of Section 14A of the Act, there cannot be any deduction in respect of expenditure incurred by the assessee in relation to income which does not form part of total income. For the purpose of computation of disallowance, the rule making authority, by virtue of power conferred on them, provided a method under Rule 8D(2) of Income-tax Rules, 1962. Whenever the Assessing Officer having regard to the account of the assessee, was not satisfied the correctness of claim that expenditure incurred by the assessee or the claim made by the assessee that no expenditure was incurred in relation to the income which does not form part of total income, he may determine the amount of expenditure in relation to such income in accordance with the method found in Rule 8D(2). The constitutional validity of Section 14A of the Act and Rule 8D of Income-tax Rules, 1962 was upheld by various High Courts in the country. The Madras High Court in Redington (India) Ltd. (2017 (1) TMI 318 - MADRAS HIGH COURT ) found that by application of matching concept, where there is no exempt income, there cannot be any disallowance of expenditure. - Decided in favour of assessee Issues:1. Disallowance made by Assessing Officer under Section 14A of the Income-tax Act, 1961.2. Delay in filing appeals by the Revenue for assessment years 2009-10, 2010-11, and 2012-13.3. Interpretation of Section 14A and Rule 8D(2) of the Income-tax Rules, 1962.4. Constitutional validity of Section 14A and Rule 8D upheld by various High Courts.5. Application of matching concept in the absence of exempt income.Issue 1: Disallowance under Section 14A:The judgment dealt with the common issue of disallowance made by the Assessing Officer under Section 14A of the Income-tax Act, 1961. The Tribunal heard the appeals of the Revenue and cross-objections of the assessee together. The Revenue contended that disallowance should be made under Rule 8D(2) even if no dividend income was received. On the other hand, the assessee argued that no disallowance should be made if no income was received. The Tribunal analyzed Section 14A and upheld the order of the lower authority, confirming that no interference was necessary.Issue 2: Delay in Filing Appeals:There was a delay of 5 days in filing appeals by the Revenue for certain assessment years. The Revenue filed petitions for condonation of delay, which were accepted by the Tribunal after considering sufficient cause for the delay. The appeals were admitted after condoning the delay.Issue 3: Interpretation of Section 14A and Rule 8D(2):The Tribunal considered the interpretation of Section 14A and Rule 8D(2) of the Income-tax Rules, 1962. The Revenue argued that disallowance should be computed under Rule 8D(2) irrespective of whether income was received, while the assessee contended that no disallowance should occur if no income was received. The Tribunal analyzed the provisions and upheld the decision of the lower authority based on the matching concept.Issue 4: Constitutional Validity of Section 14A and Rule 8D:The judgment highlighted that the constitutional validity of Section 14A of the Act and Rule 8D of the Income-tax Rules, 1962 was upheld by various High Courts. The Madras High Court's judgment in Redington (India) Ltd. emphasized the application of the matching concept, stating that no disallowance of expenditure should occur in the absence of exempt income.Issue 5: Application of Matching Concept:The Tribunal referenced the Madras High Court's judgment, which emphasized that in a year where there is no exempt income, no disallowance of expenditure should take place. The Tribunal concurred with this interpretation and confirmed the order of the lower authority. The cross-objections filed by the assessee were deemed infructuous, and both the appeals of the Revenue and cross-objections of the assessee were dismissed.This comprehensive analysis of the judgment addresses the various issues involved and the Tribunal's decision on each aspect of the case.