2015 (7) TMI 1277 - AT - Income Tax

Disallowance u/s.14A by applying rule 8D - Held that - No disallowance is to be made when there is no exempt income. No merit in the order of lower authorities for making disallowance u/s.14A r.w.r.8D, when there is no exempt income earned by the assessee.

Summary

Issues:
1. Disallowance of expenses u/s.14A by applying rule 8D.

Analysis:
The appeal filed by the revenue against the order of CIT(A) for the A.Y.2010-11 pertains to the disallowance of expenses u/s.14A by applying rule 8D. The assessee's main business includes publishing of magazines, trading in books, nutrition products, and producing films. During the scrutiny assessment, the AO disallowed expenses amounting to &8377; 5,22,832/- u/s.14A by applying rule 8D. The CIT(A) confirmed this disallowance, leading the assessee to appeal before the Tribunal.

The assessee argued that no disallowance u/s.14A should be made as they did not earn any exempt income in the form of dividends during the relevant year. The assessee cited decisions from various High Courts and ITAT Chennai Bench to support their contention. On the contrary, the revenue contended that rule 8D was applicable for the assessment year 2010-11, justifying a reasonable disallowance based on expenses debited in the profit and loss account.

The Tribunal analyzed the case, noting that the assessee did not earn any exempt income in the form of dividends during the relevant year. The AO relied on the ITAT Special Bench decision in the case of Cheminvest Ltd. to make the disallowance under section 14A, even in the absence of exempt income. However, the Tribunal referenced decisions from High Courts and ITAT Chennai Bench where disallowance u/s.14A r.w.r.8D was deleted when no exempt income was earned. The Tribunal emphasized that the disallowance under section 14A cannot be made in the absence of exempt income, as per the provisions of the IT Act.

Further, the Tribunal referred to judgments from various High Courts and ITAT decisions where it was held that if no exempt income was earned, disallowance u/s.14A was not permissible. The Tribunal concluded that no merit existed in the lower authorities' decision to make disallowance u/s.14A r.w.r.8D when no exempt income was earned by the assessee. Consequently, the appeal of the assessee was allowed, and the disallowance u/s.14A was deleted.

In summary, the Tribunal's decision emphasized that disallowance under section 14A cannot be made in the absence of exempt income, as per the provisions of the IT Act. The Tribunal relied on various High Court judgments and ITAT decisions to support the deletion of disallowance when no exempt income was earned by the assessee during the relevant year. The Tribunal's decision aligned with the principle that the disallowance u/s.14A should be based on the presence of exempt income, and in the absence of such income, the disallowance cannot be justified.