2016 (2) TMI 789 - AT - Income Tax

Disallowance u/s 14A - Held that - In the absence of any tax free income the corresponding expenditure could not be worked out for disallowance. In the instant case also, the admitted fact is that assessee has not earned any tax free income, therefore, Circular No. 5 of 2014 dated 11.2.2014 issued by CBDT is contrary to the law laid down by the different High Courts directly on the issue in hand. In view of the above discussion, and the decision of the jurisdictional High Court in the case of Cheminvest Vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT ) and Maxopp Investment Ltd. (2011 (11) TMI 267 - Delhi High Court ), we hold that disallowance made u/s 14A has deserves to be deleted, as the assessee has not earned/received exempt income during the previous year relevant to the assessment year under appeal. - Decided in favour of assessee

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act.
2. Interpretation of provisions related to disallowance of expenditure.
3. Applicability of Circular No. 5 of 2014 issued by CBDT.

Analysis:
The appeal before the Appellate Tribunal ITAT DELHI arose from an order by the ld. CIT(A)- XXXIII, New Delhi for assessment year 2009-10. The primary issue raised in the appeal was the disallowance made by the assessing officer under Section 14A of the Income Tax Act amounting to Rs. 5,83,545. The assessing officer contended that the expenses incurred in relation to income not includible in the taxable income should be disallowed as per the provisions of Section 14A. The CIT(A) upheld this disallowance, leading to the appeal before the Tribunal.

The appellant argued that no exempt income was earned during the relevant year, emphasizing investments made in subsidiary and group companies. The appellant had sufficient capital and reserves for these investments and had not earned any dividend income from them. The Tribunal noted that the controversy centered on whether disallowance under Section 14A could be made in a year where no exempt income was earned or received. The Tribunal referred to the decision in Cheminvest Vs. CIT VI and other relevant cases, where it was held that disallowance cannot be made in the absence of tax-free income.

Furthermore, the Tribunal discussed the interpretation of the term "in relation to" in Section 14A, emphasizing that expenditure must be first ascertained and reasonably determined before any disallowance can be made. The Tribunal also addressed the applicability of Circular No. 5 of 2014 issued by CBDT, highlighting that it should not conflict with judicial interpretations. In this case, the Tribunal found that the circular was in conflict with established legal principles laid down by various High Courts, leading to its disregard in the quasi-judicial function.

Ultimately, the Tribunal ruled in favor of the appellant, holding that the disallowance made under Section 14A should be deleted as no exempt income was earned or received during the relevant year. The decision was based on the precedents set by the jurisdictional High Court and the principle that corresponding expenditure cannot be worked out for disallowance in the absence of tax-free income. Therefore, the grounds raised by the appellant were allowed, and the disallowance under Section 14A was deleted.