2021 (3) TMI 152 - AT - Income Tax

Tribunal Upholds Deletion of Disallowance Under Section 14A Income Tax Act for AY 2016-17

The Tribunal dismissed the Revenue's appeal challenging the deletion of disallowance under Section 14A of the Income Tax Act for the assessment year ... Disallowance u/s 14A - no exempt income was earned by the assessee during the financial year 2015-16 relevant to the AY 2016-17- HELD THAT:- When there is no exempt income earned by the assessee, no disallowance under Section 14A of the Act can be made is no longer res integra. Similar is the decision by the Hon’ble Bombay High Court in Pr. CIT v. M/s Ballarpur Industries Ltd. [2016 (10) TMI 1039 - BOMBAY HIGH COURT] and the decision by the Hon’ble Punjab & Haryana High Court has held in CIT v. Winsome Textiles Industries Ltd. [2009 (8) TMI 220 - PUNJAB AND HARYANA HIGH COURT]. The Hon’ble Madras High Court in the case of CIT v. Celebrity Fashion Ltd. [2020 (9) TMI 1022 - MADRAS HIGH COURT] has similarly held that no disallowance can be made u/s 14A in absence of exempt income. - Decided in favour of assessee. Issues:- Disallowance under Section 14A of the Income Tax Act for the assessment year 2016-17.Detailed Analysis:1. The appeal by the Revenue challenged the order of the Commissioner of Income Tax (Appeals)-4, Mumbai regarding the disallowance under Section 14A of the Income Tax Act for the assessment year 2016-17.2. The Revenue contended that the CIT(A) erred in deleting the disallowance under Section 14A without considering the CBDT Circular No. 5 of 2014, emphasizing that expenses related to earning exempt income should be considered for disallowance regardless of when the income was earned.3. The Revenue further argued that the CIT(A) erred in deleting the disallowance by ignoring the fact that if income is exempted from tax, there is no basis for allowing deduction of expenditure incurred for earning such income.4. Additionally, the Revenue claimed that the CIT(A) erred in deleting the disallowance without considering that actual earning of income is not mandatory for deciding the deduction of expenditure laid out for earning income, citing cases involving deduction under the Income Tax Act.5. The Tribunal noted that the assessee did not earn any exempt income during the relevant financial year. Citing legal precedents, including a decision by the Hon'ble Bombay High Court, it was established that when no exempt income is earned, no disallowance under Section 14A can be made.6. Referring to the decision in Pr. CIT v. Huntsman International (India) Pvt. Ltd., the Tribunal upheld that if no exempt income is earned, no disallowance under Section 14A can be imposed. This principle was supported by various High Court decisions, including the Hon'ble Bombay High Court and the Hon'ble Punjab & Haryana High Court.7. Consequently, following the legal precedents and the absence of exempt income earned by the assessee, the Tribunal upheld the order of the CIT(A) and deleted the disallowance made by the Assessing Officer under Section 14A.8. Therefore, the appeal filed by the Revenue was dismissed based on the established legal principles and the specific circumstances of the case.