2014 (6) TMI 957 - AT - Income Tax

Disallowance u/s.14A - Held that - Since in the instant case the assessee has not received any dividend income out of the shares held as investment and since no disallowance u/s.14A has been made in the preceding as well as succeeding assessment years therefore we agree with the contention of the Ld. Counsel for the assessee that no disallowance u/s.14A can be made under the facts and circumstances of the case. Accordingly the order of the CIT(A) is setaside and the Assessing Officer is directed to delete the disallowance made u/s.14A. - Decided in favour of assessee

Summary

Issues:
1. Disallowance under section 14A relating to interest and administrative expenses.

Analysis:
The appeal was filed against the order of the CIT(A) sustaining the disallowance of Rs. 5,86,962 under section 14A out of the total disallowance of Rs. 25,10,262 by the Assessing Officer. The Assessing Officer disallowed this amount based on the provisions of section 14A r.w. Rule 8D, considering the use of borrowed funds for tax-free income-yielding investments and administrative expenses related to handling these investments. The CIT(A) upheld the disallowance of Rs. 5,86,962 while deleting the disallowance of Rs. 19,23,300 related to interest expenses, as the Revenue did not appeal against it.

The assessee contended that no disallowance should be made under section 14A as there was no receipt of tax-free income from the unlisted shares held as investments. The counsel highlighted that all shares were held in physical form, no dividend income was received from these shares, and the dividend income earned was in the share trading account. Referring to relevant case laws, the counsel argued that in the absence of tax-free income, corresponding expenditure should not be disallowed under section 14A.

The Tribunal noted that the assessee did not receive any dividend income from the shares held as investments and that no disallowance under section 14A was made in the preceding or succeeding assessment years. Citing decisions by various High Courts, the Tribunal concluded that in the absence of tax-free income, disallowance under section 14A cannot be justified. Therefore, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to delete the disallowance of Rs. 5,86,962 made under section 14A. The appeal by the assessee was partly allowed, emphasizing the principle that disallowance under section 14A requires the presence of tax-free income.

In conclusion, the Tribunal's decision focused on the absence of tax-free income from the investments, leading to the deletion of the disallowance under section 14A. The judgment highlighted the importance of a direct link between tax-free income and corresponding expenditure for disallowance under section 14A, as established by relevant case laws and the facts of the case.