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2015 (1) TMI 1103 - AT - Income TaxDisallowance u/s Sec. 14A - Held that - Keeping in view the ratio laid down in the case of CIT Vs Holcim India (P.) Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT and in the case of CIT Vs M/s Lakhani Marketing (2014 (7) TMI 44 - PUNJAB AND HARYANA HIGH COURT) are of the considered view that no disallowance u/s 14A of the Act can be made if there is no income earned. In that view of the matter we delete the disallowance made by the AO and confirmed by the ld. CIT(A). - Decided in favour of assessee.
Issues Involved:
1. Confirmation of disallowance under Section 14A of the Income Tax Act, 1961. 2. Applicability of Rule 8D for disallowance even when no exempt income is earned. Detailed Analysis: Issue 1: Confirmation of Disallowance under Section 14A The primary issue in this case was the confirmation of disallowance of Rs. 5,83,124/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961. The assessee, engaged in the business of manufacturing and trading pharmaceuticals, had invested in quoted and unquoted equity shares, including wholly owned subsidiaries. The AO invoked Rule 8D for disallowance under Section 14A, despite the assessee's claim that no expenditure was incurred for these investments. The AO's decision was based on the principle that disallowance under Section 14A is necessary even if no income has resulted or been earned in the year under consideration, citing the ITAT Special Bench decision in M/s Cheminvest Ltd. Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision. The CIT(A) referred to the Bombay High Court's ruling in M/s Godrej & Boyce Manufacturing Co. Ltd. Vs DCIT, which stated that Rule 8D is applicable from the assessment year 2008-09 and outlined three circumstances under which disallowance is required: 1. Expenditure directly relating to income not forming part of total income. 2. Proportionate disallowance of interest not directly attributable to any particular income or receipt. 3. An amount equal to one-half percent of the average value of the investment, income from which does not form part of the total income. The CIT(A) concluded that the disallowance should be the aggregate of all three circumstances and reiterated that disallowance is required even if no exempt income is earned, aligning with the ITAT Special Bench decision in M/s Cheminvest Ltd. Issue 2: Applicability of Rule 8D When No Exempt Income is Earned The assessee argued that since no dividend income was received, Section 14A should not apply, and no disallowance should be made. They cited several case laws, including CIT Vs M/s Lakhani Marketing Incl. and CIT Vs Holcim India (P) Ltd., where courts ruled that disallowance under Section 14A requires the presence of exempt income. The Tribunal considered these arguments and the relevant case laws. It noted that the assessee had not earned any dividend income from the investments in question, which were made for future growth and commercial interest. The Tribunal emphasized that Section 14A disallowance requires the following conditions: 1. There must be taxable income under the Act. 2. The income must not form part of the total income under the Act. 3. There must be an expenditure incurred by the assessee. 4. The expenditure must relate to income not forming part of the total income. The Tribunal found that since no exempt income was earned, the conditions for invoking Section 14A were not met. They referred to the Punjab and Haryana High Court's decision in CIT Vs M/s Lakhani Marketing Incl., which supported this view, and the Delhi High Court's decision in CIT Vs Holcim India (P) Ltd., which reinforced that Section 14A cannot be invoked without exempt income. Conclusion: The Tribunal concluded that disallowance under Section 14A of the Act cannot be made if no exempt income is earned. Therefore, the disallowance made by the AO and confirmed by the CIT(A) was deleted, and the appeal of the assessee was allowed. Order: The appeal of the assessee is allowed. (Order pronounced in the open Court on 16/01/2015).
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