2015 (11) TMI 1548 - AT - Income Tax

Disallowance u/s 14A - Held that - No disallowance u/s 14A of the Act can be made if there is no income earned. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the order passed under Section 153A read with Section 143(3) of the Income Tax Act, 1961.
2. Interpretation and applicability of Section 14A and Rule 8D regarding disallowance of expenditure related to exempt income.

Detailed Analysis:

1. Legality of the Order Passed Under Section 153A Read with Section 143(3) of the Income Tax Act, 1961:

The appeals, filed by the assessee, challenge the orders of the CIT (Appeals)-I, New Delhi, dated 20.12.2012, for the assessment years 2008-09 and 2009-10. The primary contention is that the orders passed under Section 153A read with Section 143(3) are "bad in law." A search and seizure action under Section 132 was carried out on 27.10.2009, and the assessee's case was covered under this operation. The assessee filed a return of income in response to a notice under Section 153A, declaring a total income of Rs. 23,01,940 for the year 2008-09. The Assessing Officer (AO) issued notices under Sections 143(2) and 142(1), and during the assessment proceedings, the AO observed that the assessee had made an investment of Rs. 3,35,00,000. The AO computed the expenses related to exempt income as per Section 14A read with Rule 8D, resulting in an addition of Rs. 24,75,158 to the declared income, bringing the total income to Rs. 47,77,098 for the year 2008-09. For the year 2009-10, the total income was recomputed to Rs. 78,43,899. The CIT (A) confirmed the AO's orders, leading to the present appeals.

2. Interpretation and Applicability of Section 14A and Rule 8D Regarding Disallowance of Expenditure Related to Exempt Income:

The core issue is whether disallowance under Section 14A read with Rule 8D is applicable when no exempt income (such as dividend) is earned during the assessment year. The AO argued that the potential to earn exempt income and the presumptive calculation of expenses under Rule 8D necessitate disallowance, even if no actual exempt income is earned. The AO relied on the ITAT Delhi decision in ACIT Vs. Cheminvest Ltd., which upheld disallowance under Section 14A even without exempt income.

The assessee contended that Section 14A and Rule 8D should not apply in the absence of actual exempt income, citing case laws such as CIT Vs. M/s Lakhani Marketing Incl. and CIT Vs. Holcim India (P) Ltd. The Tribunal noted that the Hon'ble jurisdictional High Court in Holcim India (P) Ltd. and the Punjab and Haryana High Court in M/s Lakhani Marketing Incl. have held that Section 14A cannot be invoked without actual exempt income. The Tribunal emphasized the conditions for disallowance under Section 14A, which include the existence of taxable income, expenditure incurred, and a relation between the expenditure and exempt income. Since the assessee did not earn any dividend income, the Tribunal concluded that Section 14A was wrongly invoked by the AO.

The Tribunal referenced several judgments, including those from the Hon'ble Punjab and Haryana High Court and the Gujarat High Court, which support the view that disallowance under Section 14A is not permissible without exempt income. Consequently, the Tribunal deleted the disallowance made by the AO and confirmed by the CIT (A) for both assessment years.

Additional Grounds Raised by the Assessee:

The assessee also raised additional grounds challenging the legality of additions made without incriminating material found during the search. However, since the Tribunal deleted the disallowance under Section 14A, these additional grounds were deemed academic and were not adjudicated.

Conclusion:

In conclusion, the Tribunal allowed the appeals filed by the assessee, deleting the disallowance made under Section 14A read with Rule 8D for both assessment years 2008-09 and 2009-10. The order was pronounced in open court on 27.11.2015.