No disallowance under section 14A when assessee has no tax exempt income in relevant year

The ITAT Mumbai held that no disallowance under section 14A could be made where there was no tax exempt income in the relevant previous year. The tribunal deleted the disallowance made by the Assessing Officer, upholding the assessee's plea. Regarding the procedural issue of order pronouncement beyond 90 days, the tribunal ruled that the COVID-19 lockdown period should be excluded from the 90-day time limit prescribed under rule 34(5) of the Appellate Tribunal Rules, 1963. The tribunal rejected a pedantic interpretation of the rule, considering the exceptional circumstances of the nationwide lockdown. The exception inherent in rule 34(5)(c) was deemed applicable, and no refixing of matters for clarifications was required on the case facts.

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Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Deletion of disallowance under Section 8D(2)(ii).
3. Applicability of disallowance under Section 14A while computing book profit under Section 115JB.
4. Procedural issue regarding the delay in pronouncement of the order.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:

The primary issue was whether disallowance under Section 14A could be made when the assessee had not earned any tax-exempt income during the relevant assessment year. The Tribunal noted that the assessee did not have any exempt income in the relevant previous year, yet the Assessing Officer proceeded with the disallowance. The Tribunal referred to the jurisdictional High Court's decision in PCIT Vs Ballarpur Industries Limited, which held that Section 14A envisages an actual receipt of income that is not includible in the total income for disallowance purposes. The Tribunal also cited the Delhi High Court's decision in Cheminvest Ltd Vs CIT, which reiterated that Section 14A would not apply if no exempt income was received or receivable during the relevant previous year. Consequently, the Tribunal upheld the plea of the assessee and deleted the disallowance of Rs. 80,51,200 sustained by the CIT(A).

2. Deletion of Disallowance under Section 8D(2)(ii):

The Assessing Officer's grievance was that the CIT(A) erred in deleting the disallowance of Rs. 3,35,40,340 under Section 8D(2)(ii), arguing that the assessee could not link its investments with its own funds. However, since the Tribunal upheld the plea of the assessee that no disallowance under Section 14A could be made due to the absence of exempt income, the grievances of the Assessing Officer became infructuous.

3. Applicability of Disallowance under Section 14A while Computing Book Profit under Section 115JB:

The Assessing Officer also contended that the CIT(A) erred in holding that the disallowance made under Section 14A cannot be considered while computing the book profit under Section 115JB. The Tribunal, however, did not delve into this issue in detail as it was rendered moot by the decision that no disallowance under Section 14A could be made in the absence of exempt income.

4. Procedural Issue Regarding the Delay in Pronouncement of the Order:

The Tribunal addressed the procedural issue of the delay in pronouncement of the order beyond 90 days from the date of concluding the hearing. It was noted that the delay was due to the unprecedented situation caused by the COVID-19 pandemic and the nationwide lockdown imposed by the Government of India. The Tribunal referred to the Hon’ble Supreme Court's orders extending the limitation period due to the lockdown and concluded that the period during which the lockdown was in force should be excluded for the purpose of the 90-day time limit for pronouncement of orders as stipulated in Rule 34(5) of the Appellate Tribunal Rules, 1963.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the disallowance of Rs. 80,51,200 under Section 14A, and dismissed the appeal of the Assessing Officer as infructuous. The order was pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board.

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