Section 14A barred without exempt income; project expense provisions under percentage completion method remained exposed to TDS disallowance.

Section 14A cannot be invoked where no exempt income is earned, so the disallowance on that ground failed. By contrast, year-end provisions for unfinished work and related project under the percentage completion method were treated as contract-related expenditure attracting TDS under section 194C, supporting disallowance under section 40(a)(ia) for non-deduction of tax at source. The record also indicated that some later-year payment and TDS particulars had not been examined, so that limited aspect required reconsideration. The section 40(a)(ia) disallowance was therefore broadly sustained, subject only to restricted verification of subsequent compliance, while the section 14A disallowance was deleted.

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Issues: (i) Whether provisions made towards unfinished work and related project expenses in a percentage completion method assessment were liable to disallowance under section 40(a)(ia) and section 43B for non-deduction of tax at source. (ii) Whether disallowance under section 14A could be sustained in the absence of exempt income during the year.

Issue (i): Whether provisions made towards unfinished work and related project expenses in a percentage completion method assessment were liable to disallowance under section 40(a)(ia) and section 43B for non-deduction of tax at source.

Analysis: The assessee had recognised revenue under the percentage completion method and had created year-end provisions for unfinished work. The assessee's case was that such estimates could not be subjected to tax deduction at source because exact liability was not crystallised at that stage and that TDS, wherever applicable, had been deducted in later years when actual payments were made. The appellate finding, however, treated those provisions which represented contract-related expenditure as exigible to deduction of tax at source under section 194C, and sustained disallowance under section 40(a)(ia) to that extent. At the same time, the record also showed that some later-year payment and TDS details furnished before the first appellate authority had not been considered, warranting limited re-examination of that aspect.

Conclusion: The disallowance under section 40(a)(ia) was broadly upheld, but the matter was restored for limited consideration of the later payment and TDS details.

Issue (ii): Whether disallowance under section 14A could be sustained in the absence of exempt income during the year.

Analysis: The year did not involve any exempt income, and the settled legal position is that section 14A cannot be invoked where no exempt income is earned. On that basis, the disallowance made on this count could not survive.

Conclusion: The disallowance under section 14A was deleted.

Final Conclusion: The appeal succeeded only in part, with the section 14A disallowance set aside and the TDS-related disallowance under section 40(a)(ia) left intact except for limited reconsideration of the subsequent deduction details.

Ratio Decidendi: In the absence of exempt income, section 14A cannot be applied; and provisions for project expenditure under a percentage completion method may still attract TDS-based disallowance where the expenditure is of a kind covered by the TDS provisions, subject to limited factual verification of later compliance.

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