2018 (11) TMI 1050 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on Section 14A disallowances, dismisses Revenue's appeal.

The Tribunal upheld the CIT(A)'s decision to delete disallowances under Section 14A for both the taxable and agricultural divisions. The appeal by the ... Disallowance made u/s 14A - expenditure debited in the taxable divisions of the assessee - Held that:- We find that the assessee had not derived any exempt income in the form of dividend and hence there is no question of applicability of provisions of section 14A thereon. See CIT VERSUS M/S. CHETTINAD LOGISTICS PVT. LTD.[2017 (4) TMI 298 - MADRAS HIGH COURT]. We find no infirmity in the order of the CIT-A deleting the disallowance u/s 14A. Accordingly, the Ground No. 1 raised by the revenue is dismissed. Disallowance u/s 14A made towards agriculture division - Held that:- We find that the assessee had provided segmental annual statement of accounts for each of its divisions. The assessee had claimed agricultural income as exempt after reducing the expenditure attributable to agriculture division from the gross receipts of agriculture division. The assessee had not claimed exemption towards agricultural income on its gross receipts. As claimed exemption u/s 10(1) only for the net agricultural income. We hold that there is no need to take into account any direct or indirect expenses of the agriculture division and apply the provisions of section 14A of the Act thereon. We hold that the CIT-A had rightly deleted the disallowance u/s 14A of the Act in the sum of ₹ 21,13,761/- which does not call for any interference. Accordingly, the Ground No. 2 raised by the revenue is dismissed. Issues Involved:1. Justification of disallowance under Section 14A of the Income Tax Act.2. Applicability of Rule 8D in relation to exempt agricultural income.Detailed Analysis:1. Justification of Disallowance under Section 14A:The appeal by the Revenue contests the deletion of disallowance made under Section 14A of the Income Tax Act by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, engaged in the business of sugar cane cultivation, sugar manufacturing, and trading in electrical appliances, filed a return declaring a total loss, which was later revised. The Assessing Officer (AO) noted that the assessee had paid interest on borrowed funds and recomputed the disallowance under Section 14A read with Rule 8D, totaling Rs. 74,18,344/-.The assessee contended that the borrowed funds were used solely for business purposes, and investments in shares were made using its own funds. The CIT(A) accepted the assessee's argument, noting that no exempt income was earned during the year, making the provisions of Section 14A read with Rule 8D inapplicable. This was supported by various judicial decisions, including the Delhi High Court's ruling in Chem Invest Ltd. vs. CIT, which held that no disallowance is warranted under Section 14A when no exempt income is earned.The Tribunal upheld the CIT(A)'s decision, referencing multiple high court rulings that support the non-applicability of Section 14A in the absence of exempt income. Consequently, the Tribunal found no infirmity in the CIT(A)'s deletion of the disallowance of Rs. 74,18,344/-.2. Applicability of Rule 8D in Relation to Exempt Agricultural Income:The AO had also made a disallowance of Rs. 21,13,761/- under Section 14A read with Rule 8D(2)(iii) concerning the agricultural division's exempt income. The assessee maintained separate accounts for its divisions and claimed exemption for net agricultural income after deducting related expenses. The AO, however, applied Rule 8D to determine the disallowance, assuming indirect expenses were not properly allocated.The CIT(A) found the AO's approach flawed, noting that the assessee had already deducted all relatable expenses from the agricultural income, and no further disallowance under Section 14A was warranted. This position was consistent with CIT(A)'s earlier decisions for previous assessment years, where similar disallowances were deleted.The Tribunal concurred with the CIT(A), emphasizing that the assessee had claimed exemption only for net agricultural income after deducting attributable expenses. Therefore, no additional direct or indirect expenses needed to be considered under Section 14A. The Tribunal upheld the CIT(A)'s deletion of the disallowance of Rs. 21,13,761/-.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletion of disallowances under Section 14A for both the taxable divisions and the agricultural division. The order was pronounced on 16.11.2018.