2021 (10) TMI 1480 - AT - Income Tax

No disallowance under Section 14A or Rule 8D when no exempt income earned; Revenue appeal dismissed

ITAT, DELHI (AT) held that disallowance under section 14A could not be invoked where no exempt income was earned in the relevant assessment year. Applying ... Disallowance u/s 14A - no exempt income earned in the relevant assessment year - HELD THAT:- As decided in Holcim India Pvt. Ltd. [2014 (9) TMI 434 - DELHI HIGH COURT] that since no exempt dividend income was earned the question of invoking Section 14 A of the Act read with Rule 8D did not arise. Appeal of the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A of the Income-tax Act is sustainable where no exempt income (tax-free dividend) has been earned in the relevant assessment year and investments were made in subsidiaries for strategic purposes, including investments in a foreign subsidiary whose dividend, if any, would not be exempt. 2. Whether depreciation claimed on World Trade Centre and World Trade Tower is liable to be disallowed under section 32 (or other relevant provisions) where precedent authority has permitted such depreciation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance under section 14A where no exempt income was earned Legal framework: Section 14A permits disallowance of expenditure incurred in relation to exempt income; Rule 8D provides a method to compute such disallowance. The controlling principle is that section 14A applies only to expenditure in relation to exempt income actually earned or attributable to earning exempt income. Precedent Treatment: The Tribunal and the High Court have applied the principle that where no exempt dividend income is earned in the year, invocation of section 14A and computation under Rule 8D is not justified. The Court followed the jurisdictional High Court decision (which in turn relied on earlier authority such as the decision in Holcim India Pvt. Ltd.) holding section 14A inapplicable when exempt income is absent. Interpretation and reasoning: The Court accepted the factual findings that (i) no dividend exempt under the Act was received during the year, (ii) investments in subsidiaries were made for strategic purposes, and (iii) certain investments were in a foreign subsidiary whose dividend would not be exempt under domestic law. On these facts the Court reasoned that there is no causal relationship between expenditures and exempt income in the relevant year, so section 14A/Rule 8D cannot be invoked to disallow expenditure. The Court treated the factual determination as not perverse and applied settled precedent to conclude that section 14A does not arise where no exempt income is earned. Ratio vs. Obiter: Ratio - where no exempt income is received in the assessment year, disallowance under section 14A (and computation under Rule 8D) is not sustainable. The factual findings underpinning that ratio (strategic purpose of investments; foreign subsidiary dividends not exempt) are integral to the ratio. No obiter dicta affecting broader law were recorded beyond application of binding precedent. Conclusion: The disallowance under section 14A amounting to the specified sum was deleted; the Tribunal affirmed the appellate authority's deletion and rejected Revenue's challenge. Issue 2 - Disallowance of depreciation on World Trade Centre and World Trade Tower Legal framework: Depreciation on building assets is allowable under section 32 subject to fulfillment of statutory conditions and consistent application of rates and classification of assets. Precedent Treatment: The Court noted an existing binding decision of the jurisdictional High Court holding that depreciation on the specified buildings is allowable. The Tribunal followed that decision in prior assessment years and in the present assessment year applied the same principle. Interpretation and reasoning: Given the prior High Court determination directly on point and absence of any distinguishing factual matrix or contrary binding authority, the Court treated the allowance of depreciation as settled law. No fresh legal infirmity in the assessment officer's disallowance was shown; the earlier judicial determination controlled the outcome. Ratio vs. Obiter: Ratio - depreciation on the specified buildings is allowable under section 32 as held by the controlling High Court authority; application of that ratio to the present facts is determinative. No obiter observations altering the principle were made. Conclusion: The disallowance of depreciation was deleted by the appellate authority and that deletion was affirmed by the Tribunal. Cross-reference The resolution of both issues turned on application of binding precedent and factual findings: (a) absence of exempt income was dispositive for section 14A, and (b) prior High Court authority was dispositive for allowance of depreciation. The Tribunal declined to interfere where facts and controlling precedent remained unchanged.