2017 (5) TMI 1603 - AT - Income Tax

Disallowance u/s 14A - Held that - the provisions of section 14A of I.T. Act 1961 would no apply if not exempted income was received during the relevant previous year - since in the present case no exempt income has been received therefore provisions of section 14A cannot be invoked by AO - Decided in favor of assessee.

Summary

Issues:
1. Invocation of provisions of section 14A of the I.T. Act despite no receipt of exempt income by the assessee during the relevant year.

Detailed Analysis:

Issue 1: Invocation of section 14A provisions despite no exempt income received:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2010-11. The primary contention was the invoking of section 14A of the Income Tax Act by the Assessing Officer (AO) despite the assessee not receiving any exempt income during the relevant year. The AO had determined the total income at ?2,74,31,417 by disallowing expenses under section 14A and setting off carried forward business loss. The CIT(A) upheld the assessment order, leading to the present appeal.
The assessee argued that as no exempt income was received during the year, the AO was not justified in applying section 14A. The assessee relied on various judgments, including those of different High Courts, to support the contention that disallowance under section 14A is not applicable when no exempt income is received. The CIT(A) upheld the disallowance citing a circular by the CBDT, which emphasized that expenses related to earning exempt income should be considered for disallowance irrespective of actual receipt of such income during the year.
Upon review, the Tribunal noted conflicting views between the CIT(A)'s decision based on the CBDT circular and the judgments cited by the assessee, particularly a judgment of the jurisdictional High Court of Bombay. The Bombay High Court's judgment clarified that section 14A does not apply if no exempt income was received during the relevant year. The Tribunal, in line with the Bombay High Court's decision and to maintain judicial consistency, ruled in favor of the assessee, directing the AO to delete the disallowance under section 14A due to the absence of any exempt income receipt.

Conclusion:
The Tribunal allowed the appeal, concluding that since no exempt income was received during the relevant year, the provisions of section 14A of the Income Tax Act could not be invoked by the Assessing Officer. The judgment emphasized the importance of judicial consistency and adherence to the decisions of the jurisdictional High Court in interpreting tax laws.