2020 (9) TMI 877 - HC - Income Tax

Gujarat High Court Upholds Dismissal of Tax Appeal on Section 14A Disallowance Criteria

The Gujarat High Court dismissed the Tax Appeal, upholding the decision of the lower authorities that disallowance under Section 14A of the Income Tax Act ... Disallowance u/s 14A - Whether there is no tax free income earned during the year ? - ITAT upholding the order of the CIT(A) that no disallowance u/s 14A can be made - HELD THAT:- CIT(A) as well as the Appellate Tribunal rightly applied the dictum as laid by the Supreme Court in the case of Maxopp Investment Ltd [2018 (3) TMI 805 - SUPREME COURT] as held that as the assessee had not made any claim for the exemption of any income from payment of tax, the disallowance under Section 14A of the Act cannot be made. To attract the provisions of Section 14A of the Act, 1961, it is necessary that the assessee should have earned any exempt income. If the assessee has not earned an exempt income and has not claimed so in his return of income, then the provisions of Section 14A would not be applicable. Concurring finding of fact recorded by the two authorities is that in the year under consideration, the assessee company had not earned any exempt income and had not claimed any such exempt income in his return of income. - Decided against revenue. Issues:1. Interpretation of Section 14A of the Income Tax Act, 1961 regarding disallowance of expenses for earning exempt income.2. Application of CBDT circular No.5/2014 dated February 11, 2014 in disallowance under Section 14A.3. Assessment of disallowance under Section 14A read with Rule 8D of the Income Tax Rules.4. Consideration of judicial precedents in determining disallowance under Section 14A.5. Applicability of the Supreme Court decision in Maxopp Investment Ltd. case to the current scenario.Analysis:The Tax Appeal before the Gujarat High Court involved the interpretation of Section 14A of the Income Tax Act, 1961 concerning the disallowance of expenses for earning exempt income. The Revenue challenged the order of the Income Tax Appellate Tribunal, which upheld the decision of the CIT(A) in a case where the assessee had not earned any exempt income during the relevant assessment year. The Revenue contended that disallowance under Section 14A should be made even if no tax-free income was earned, citing CBDT circular No.5/2014. The Assessing Officer computed a disallowance under Section 14A read with Rule 8D of the Income Tax Rules, which was added to the total income of the assessee.The CIT(A) deleted the addition based on the Supreme Court decision in the Maxopp Investment Ltd. case, which held that if no claim for the exemption of income from tax payment was made, disallowance under Section 14A could not be imposed. The Tribunal affirmed the CIT(A)'s decision, noting that the assessee had not earned any exempt income during the assessment year. Both the CIT(A) and the Tribunal correctly applied the Supreme Court's ruling in the Maxopp Investment Ltd. case, emphasizing that for Section 14A to apply, the assessee must have earned exempt income and claimed it in the tax return.Ultimately, the High Court dismissed the Tax Appeal, agreeing with the lower authorities' findings that the assessee had not earned any exempt income nor claimed such income in the return for the relevant year. Therefore, the provisions of Section 14A were deemed inapplicable in this scenario, leading to the dismissal of the appeal.