Disallowance under Section 14A not warranted when no exempt income earned during year

ITAT Kolkata allowed the assessee's appeal on disallowance u/s 14A r.w.r. 8D(2), holding that no disallowance is warranted when no exempt income was earned during the year, following Era Infrastructure precedent that disallowance cannot exceed exempt income earned. Regarding addition u/s 41(1) based on irrecoverable amounts claimed by other companies, the matter was restored to AO for fresh adjudication after assessee sought admission of additional evidence under Rule 29, with directions for full cooperation and document production.

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Issues Involved:
- Disallowance u/s 14A r.w.r. 8D(2) of the Act
- Addition u/s 41(1) of the Act

Disallowance u/s 14A r.w.r. 8D(2) of the Act:
In both appeals, the assessee challenged the disallowance u/s 14A r.w.r. 8D(2) of the Act for the Assessment Years 2018-19 and 2020-21. The appellant contended that since there was no exempt income earned during the years and investments were made from its own funds in port-related entities, the disallowance should be deleted. Citing the case of PCIT Vs. Era Infrastructure (India) Ltd., it was argued that the disallowance should not exceed the exempt income earned. The Tribunal found the appellant's arguments valid and allowed the common issue raised in both years.

Addition u/s 41(1) of the Act:
For the Assessment Year 2020-21, the appellant contested an addition of Rs. 5,35,626 u/s 41(1) of the Act. The Assessing Officer made this addition based on information that certain companies claimed irrecoverable amounts from the appellant. Despite the appellant's explanation that there were no closing balances with these companies and transactions were squared off, the addition was upheld by the CIT(A). However, upon review, the Tribunal noted that there was no liability in the books of accounts of the appellant with the concerned companies. As a result, the issue was remanded back to the Assessing Officer for fresh adjudication, allowing the appellant's appeal for statistical purposes.

In conclusion, the appeal for Assessment Year 2018-19 was allowed, and for Assessment Year 2020-21, it was partly allowed for statistical purposes. The order was pronounced on 8th April, 2024, at Kolkata.

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