Section 14A disallowance fails where no exempt income is earned, and incorrect self-disallowance may be withdrawn during assessment.
A taxpayer may withdraw an incorrect suo motu expense disallowance made in its return during assessment proceedings. Further, disallowance of expenditure relating to exempt income under section 14A read with Rule 8D is not warranted where no exempt income was earned in the relevant assessment year. Applying these principles, the self-disallowance and the additional section 14A disallowance were deleted, with consequential relief. The stay application became infructuous.
Issues: (i) Whether the suo moto disallowance of expenses made by the assessee in the return can be withdrawn during assessment proceedings; (ii) Whether disallowance under section 14A read with Rule 8D is permissible where the assessee has not earned any exempt income in the relevant assessment year.
Issue (i): Whether the suo motu disallowance of expenses made by the assessee in the return can be withdrawn during assessment proceedings.
Analysis: The Bench examined whether an assessee who had made a suo motu disallowance in the return may subsequently retract that disallowance during assessment and before appellate authorities, having regard to precedent of the Coordinate Bench permitting such withdrawal where appropriate. The Court considered the submissions and prior decisions addressing the ability of an assessee to rectify an incorrect self-disallowance in the assessment process.
Conclusion: The suo motu disallowance of Rs. 18,28,62,017/- made by the assessee in the return is deleted; the assessee is permitted to withdraw the suo motu disallowance during the assessment proceedings.
Issue (ii): Whether disallowance under section 14A read with Rule 8D is permissible where the assessee has not earned any exempt income in the relevant assessment year.
Analysis: The Bench analysed applicability of section 14A and Rule 8D in the absence of exempt income and considered Coordinate Bench precedents holding that, where no exempt income is earned in the year, disallowance under section 14A read with Rule 8D is not called for. The Court applied those precedents to the undisputed fact that the assessee did not earn exempt income in the relevant year.
Conclusion: The additional disallowance of Rs. 24,94,58,174/- made under section 14A read with Rule 8D is deleted; disallowance under section 14A read with Rule 8D is not applicable in the assessee's case where no exempt income was earned.
Final Conclusion: The appeal is allowed with deletions of the additions made under section 14A read with Rule 8D; consequential relief follows and the stay application is dismissed as infructuous.
Ratio Decidendi: In the absence of exempt income for the relevant assessment year, disallowance under section 14A read with Rule 8D is not warranted; additionally, a suo motu disallowance made in the return may be withdrawn during assessment proceedings.