2020 (8) TMI 706 - AT - Income Tax

Tribunal Dismisses Revenue's Appeal on Section 14A Disallowance

ACIT, Circle-2 (1), Guntur. Versus M/s. NSL Textiles Limited

The Tribunal upheld the decision of the CIT(A) and dismissed the appeal filed by the Revenue. It was held that disallowance under Section 14A read with ... Addition u/s 14A - Whether the provisions of section 14A are applicable even when no exempt income is earned? - CIT-A deleted the addition - HELD THAT:- As decided in CHEMINVEST LIMITED VERSUS COMMISSIONER OF INCOME TAX-VI [2015 (9) TMI 238 - DELHI HIGH COURT] and M/S. CHETTINAD LOGISTICS PVT. LTD. [2017 (4) TMI 298 - MADRAS HIGH COURT] questions of law, which could have arisen are already covered by the judgment of a Co-ordinate Bench of this Court rendered in M/s.Redington (India) Limited case [2017 (1) TMI 318 - MADRAS HIGH COURT]. Recently, the Hon'ble Supreme Court [2018 (7) TMI 567 - SC ORDER] dismissed the SLP filed against the decision of the High Court wherein it was held that section 14A of Act cannot be invoked where no exempt income was earned in the relevant year. - Decided in favour of assessee. Issues Involved:1. Applicability of Section 14A when no exempt income is earned.2. Validity of Circular No. 05/2014 issued by CBDT regarding disallowance under Section 14A.3. Jurisdictional consistency and precedence in applying Section 14A.Detailed Analysis:1. Applicability of Section 14A when no exempt income is earned:The core issue in this appeal is whether the provisions of Section 14A of the Income Tax Act, which deals with the disallowance of expenditure incurred in relation to income not includible in total income, are applicable even when no exempt income is earned during the relevant assessment year.The Assessing Officer (AO) disallowed an amount of Rs. 6,99,345/- under Section 14A read with Rule 8D, reasoning that the investments made would yield exempt income, and thus, expenses related to such investments should be disallowed. This was based on the CBDT Circular No. 05/2014.On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition made by the AO, referencing judgments from the Hon'ble Delhi High Court in *Cheminvest Limited Vs. CIT* and the Hon'ble Madras High Court in *CIT Vs. M/s. Chettinad Logistics Pvt. Ltd.*, which held that Section 14A cannot be applied if no exempt income is earned during the year.2. Validity of Circular No. 05/2014 issued by CBDT:The AO relied on CBDT Circular No. 05/2014, which clarifies that disallowance under Section 14A should be made even if no exempt income is earned during the financial year. However, various courts have held that this circular cannot override the explicit provisions of Section 14A read with Rule 8D.The Hon'ble Delhi High Court in *IL & FS Energy Development Company Ltd.* and the Hon'ble Madras High Court in *Chettinad Logistics (P) Ltd.* have both held that Rule 8D cannot override the provisions of Section 14A, emphasizing that disallowance under Section 14A is only applicable when there is actual exempt income earned during the relevant year.3. Jurisdictional consistency and precedence in applying Section 14A:The Tribunal has consistently followed the principle that no disallowance under Section 14A is warranted if no exempt income is earned during the year. This view is supported by several judgments, including those from the Hon'ble Delhi High Court, Hon'ble Madras High Court, and Hon'ble Gujarat High Court.In the present case, the CIT(A) followed the decision of the Hon'ble Delhi High Court in *Cheminvest Ltd.* and the Hon'ble Madras High Court in *Redington (India) Ltd.*, which have been upheld by the Tribunal in similar cases, including *ACIT Vs. M/s. Shri Girija Smelters Ltd.* and *D. Veerabhadra Reddy (HUF) vs. DCIT*.Conclusion:The Tribunal upheld the decision of the CIT(A) and dismissed the appeal filed by the Revenue. The Tribunal reiterated that disallowance under Section 14A read with Rule 8D is not applicable when no exempt income is earned during the relevant assessment year. The reliance on CBDT Circular No. 05/2014 by the AO was deemed incorrect, as the circular cannot override the explicit provisions of the law. The Tribunal's decision aligns with the consistent judicial view that Section 14A disallowance requires actual receipt of exempt income during the relevant year.