2018 (3) TMI 1309 - AT - Income Tax

Tribunal rejects Revenue's appeal, confirms no Section 14A disallowance due.

ITO, Wd-12 (3), Kolkata Versus M/s. Jhabua Power Ltd.

The Tribunal upheld the CIT(A)'s decision, ruling that no disallowance under Section 14A of the Income Tax Act was warranted as the assessee had not shown ... Disallowance u/s 14A - Held that:- As relying on supreme court in the case of WALFORT SHARE & STOCK BROKERS (P) LTD. (2010 (7) TMI 15 - SUPREME COURT) net income of the assessee is computed provided there is income and expenditure and in the assessee’s case under consideration there is no any income and expenditure therefore disallowance of expenditure (which related to the exempt income) is not required. That being so, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Applicability of Rule 8D in computing disallowance.3. Treatment of project development expenditure and incidental income.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The Revenue contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in allowing relief to the assessee regarding the disallowance under Section 14A of the Income Tax Act. The Assessing Officer (AO) had made this disallowance on the grounds that the assessee had not allocated any part of the expenditure towards earning exempt income, thereby avoiding tax. The AO observed that the assessee had significant mutual fund investments and exempt income but did not prepare a profit and loss account, suggesting an intention to avoid the applicability of Section 14A read with Rule 8D.During the appellate proceedings, the assessee argued that no income was declared in the profit and loss account because the plant was under construction, and all expenses were capitalized under 'project development expenditure.' The CIT(A) accepted this explanation, noting that the assessee had not claimed any deduction for expenses, and therefore, the AO's disallowance of hypothetical expenses was unjustified.2. Applicability of Rule 8D in Computing Disallowance:The AO computed the disallowance under Section 14A read with Rule 8D, amounting to Rs. 3,04,42,822/-. This included proportionate interest expenses and 0.5% of the average value of investments. However, the CIT(A) deleted this addition, reasoning that since the assessee had not claimed any expenditure in the profit and loss account, the disallowance under Section 14A was not applicable.The Tribunal upheld the CIT(A)'s decision, emphasizing that the disallowance under Section 14A is only warranted when there is income and expenditure shown in the profit and loss account. The Tribunal referenced the judgment of the Coordinate Bench, Mumbai, in M/s. TAG Offshore Limited vs. ACIT-5(3), which held that disallowance under Section 14A is not justified if no expenditure is claimed by the assessee.3. Treatment of Project Development Expenditure and Incidental Income:The Tribunal noted that the assessee's project was at the construction stage, and all expenses were capitalized under 'project development expenditure.' The income earned from interest and dividends was incidental and directly related to the capital cost of the project. Therefore, these incomes were set off against the project development expenses.The Tribunal further clarified that the apportionment of pre-operative expenses between exempt income and construction period expenses is not specified under Section 14A read with Rule 8D. Since the assessee had not computed any total income or shown any income in the profit and loss account, the disallowance under Section 14A did not arise.The Tribunal also relied on the judgment of the Hon'ble Supreme Court in WALFORT SHARE & STOCK BROKERS (P) LTD., which stated that Section 14A applies to expenses related to exempt income and that no disallowance should be made if there is no income and expenditure shown in the profit and loss account.Conclusion:The Tribunal concluded that since the assessee had not shown any income or expenditure in the profit and loss account, the basis for invoking Section 14A disallowance did not arise. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal and confirming that no disallowance under Section 14A was warranted in this case. The appeal filed by the Revenue was dismissed, and the order was pronounced in open court on 23/03/2018.