TaxTMI 
TaxTMI 
2019 (3) TMI 1545
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.... admitting total loss of Rs. 4,46,32,496/- for the A.Y.2012-13 and Rs. 3,78,51,394/- for the A.Y. 2013-14. The assessment was completed u/s 143(3) on total loss of Rs. 1,62,58,913 for the A.Y.2012- 13 and Rs. 1,05,85,358/- for the A.Y.2013-14. During the assessment proceedings, the AO made the following additions to the income / loss returned as under : A.Y.2012-13 (i) Disallowance of expenditure u/s 40(a)(ia) Rs.1,23,500 (ii) Non confirmation from creditor Rs.39,155 (iii) Expenditure in relation to exempt income u/s 14A Rs.2,70,89,092 (iv) Disallowance of expenditure due to non submission of vouchers which are verifiable Rs.6,26,136 A.Y.2013-14 (i) Disallowance of expenditure towards penal charges for late payment of various statutory payments and income tax interest (94862 + 167679) 2,62,541 (iii) Expenditure in relation to exempt income u/s 14A Rs.2,70,03,495 The assessee did not disallow any expenditure related to the exempt income u/s 14A of the Act. Therefore, the AO invoked the provisions of section 14A and made the disallowance of Rs. 2,70,89,092/- and Rs. 2,70,03,495/- under Rule 8D of Income Tax Rule....
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....sessee and the assessee did not earn the income which is exempt u/s 14A of the Act. The above facts were not disputed by the lower authorities. The AO made the addition placing reliance on the Circular No.5/2014 of the CBDT and the Ld.CIT(A) confirmed the addition. Hon'ble High Court of Delhi in the case of Pr.Commissioner of Income Tax Vs. IL &FS Energy Development Company Ltd. (supra) considered the Board Circular and held that the Circular cannot override the express provisions of section 14A r.w.Rule 8D of I.T.Rules. After considering various decisions, Hon'ble High Court of Delhi held that no disallowance u/s 14A of the Act was called for in case of no exempt income earned by the assessee, in the relevant assessment year. For the sake of clarity and convenience, we extract relevant part of the order of the Hon'ble High Court of Delhi which reads as under : "12. Section 14A of the Act, which was inserted with retrospective effect from 1st April 1962, provides for disallowance of the expenditure incurred in relation to income exempted from tax. From 11th May 2001, a proviso was inserted in Section 14A to clarify that it could not be used to reopen or rectify a completed....
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...., in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2)." 17. The words 'in relation to income which does not form part of the total income under the Act for such previous year" in the above Rule 8D(1) indicates a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in 'Such previous year'. This implies that if there is no exempt income earned in the AY in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A reed with Rule 8D would not arise, 18. The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D(1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A, The Circular concludes that it is not necessary that exempt income should necessarily be included ....
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.... Prasad Moody [1978] 115 ITR 519 (SC) explained that deduction is allowable even where income was not actually earned in the AY in question. This aspect of the matter was dealt with by this Court in M/s Cheminvest Ltd. (supra) where it reversed the decision of the Special Bench of the ITAT by observing as under: "20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57 (iii) of the Act could be allowed as a deduction against dividend income assessable under the head "income from other sources". Under Section 57 (iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "Incurred for making or earning such income?, did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: "What s. 57....
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....nal also in the case of SLC Projects Pvt. Ltd. vs. ACIT, CC-2 (supra) for the A.Y. 2013-14 held that no disallowance is called for in the absence of exempt income. We extract relevant part of the order of this Tribunal from para No.9 to 10 which reads as under : "9. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The Ld. A.R. argued that no expenditure required to be disallowed in case the assessee did not earn any exempt income. In the instant case, the assessee has not earned any dividend income which is exempt u/s 14A of the Act. On identical facts, this Tribunal in the case of D. Veerabhadra Reddy (HUF) Vs. JCIT, Kakinada in ITA No.263/Vizag/2014 dated 23.6.2017 for the assessment year 2009-10 placing reliance on Hon'ble Madras High Court judgement in the case of Redington India Limited Vs. Additional CIT 77 Taxmann. Com 257 held that no disallowance is called for when there is no exempt income. For ready reference, we extract relevant paragraph No.6 of this Tribunal order which reads as under: "6. We have heard the rival submissions and perused the material on record. The assessee....