2020 (10) TMI 518 - HC - Income Tax

High Court upholds revenue in Section 14A case, emphasizing disallowance applies irrespective of actual exempt income

The High Court ruled in favor of the revenue, overturning the Tribunal's decision, emphasizing that the disallowance under Section 14A of the Income Tax ... Disallowance u/s 14A read with Rule 8D - whether tax payer in a particular year has not earned any exempted income? - Tribunal has held that since the assessee had not received any dividend on the investment and since there was no earning to exempt income, therefore, there can be no disallowance under Section 14A - HELD THAT:- The aforesaid issue is no longer res-integra and is covered by the decision of the Supreme Court in MAXOPP INVESTMENT LIMITED [2018 (3) TMI 805 - SUPREME COURT] as well as Circular No.5/2014 dated 11.02.2014 issued by the Central Board of Direct Taxes which clearly provides that disallowance under Section 14A of the Act read with Rule 8D has to be made even when the tax paid for a particular year is not earned in exempt income, the substantial question of law framed by this Court is answered in negative and in favour of revenue. Order of the Tribunal insofar as it pertains to disallowance under Section 14A of the Act read with Rule 8D of the Income Tax Rules is hereby quashed. Issues:- Interpretation of Section 14A of the Income Tax Act, 1961 regarding disallowance of interest expenditure.- Application of Rule 8D of the Income Tax Rules in determining disallowance under Section 14A.- Relevance of earning exempt income for invoking Section 14A.Issue 1: Interpretation of Section 14AThe case involved an appeal under Section 260-A of the Income Tax Act, 1961, concerning the disallowance of interest expenditure by the Assessing Officer under Section 14A of the Act read with Rule 8D of the Income Tax Rules. The Tribunal had allowed the appeal by the assessee, stating that unless there is a receipt of exempted income, Section 14A cannot be invoked. The revenue contended that the Tribunal's decision contradicted the law laid down by the Supreme Court in a previous case. The High Court analyzed the arguments and referred to the Supreme Court's decision in another case to establish that the disallowance under Section 14A is applicable even if the taxpayer has not earned any exempted income in a particular year.Issue 2: Application of Rule 8DThe revenue argued that the Tribunal's decision was erroneous as it did not consider the applicability of sub-sections (2) and (3) inserted in Section 14A by the Finance Act, 2006, which are prospective and apply to the assessment year 2007-08. The High Court examined the submissions and concluded that the Tribunal's decision was not in line with the law laid down by the Supreme Court and Circular No.5/2014 issued by the Central Board of Direct Taxes. The Court emphasized that the disallowance under Section 14A read with Rule 8D must be made irrespective of the taxpayer earning exempt income in a specific year.Issue 3: Relevance of Exempt IncomeThe primary contention revolved around whether the disallowance under Section 14A could be made when the taxpayer had not received any dividend income on investments, leading to a lack of exempt income. The High Court referred to the Supreme Court's decision and Circular No.5/2014, emphasizing that the disallowance under Section 14A is mandatory even if there is no earning of exempt income. The Court, therefore, quashed the Tribunal's order regarding the disallowance under Section 14A of the Act read with Rule 8D of the Income Tax Rules, ruling in favor of the revenue and allowing the appeal.This detailed analysis of the judgment showcases the High Court's interpretation of Section 14A, application of Rule 8D, and the significance of earning exempt income in invoking the provisions of the Income Tax Act, 1961.