2016 (2) TMI 1200 - AT - Income Tax

Addition u/s 14A - Held that - The undisputed facts of the case are that the assessee has not received any tax-free income during the year. Neither the learned CIT (Appeals) nor the learned D.R. during the course of hearing before us has controverted this fact. In this factual situation, the I.T.A.T., Chandigarh Bench in M/s BCL Industries & Infrastructures Ltd. 2016 (1) TMI 1250 - ITAT CHANDIGARH No disallowance under section 14A of the Act can be made if there is no taxable income earned during the year. Assessee has not been able to demonstrate before us with the help of documents that no tax free income has actually been earned during year. In view of this, we think it proper to send the case back to the file of the Assessing Officer. If there is no tax free income during the year, the Assessing Officer is directed not to make disallowance under section 14A of the Act. Otherwise, he has to decide the case as per law. - Decided in favour of assessee.

Summary

Issues:
Disallowance under section 14A of the Income Tax Act for an assessee who did not earn any tax-free income during the relevant assessment year.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2010-11, concerning the disallowance of financial expenses/interest made by the Assessing Officer under section 14A of the Income Tax Act. The assessee argued that since no exempt income was claimed, the disallowance could not be justified. The Commissioner dismissed the appeal, citing the mandatory application of Rule 8D of the Income Tax Rules by the Assessing Officer. The assessee then appealed, contending that no tax-free income was earned during the relevant year. The counsel relied on judgments from Punjab & Haryana High Court and Delhi High Court to support the claim. The Departmental Representative (D.R.) supported the lower authorities' decision and cited various judgments, including the Supreme Court's decision in CIT Vs. Walfort Share & Stock Pvt. Ltd. The Tribunal noted that the assessee had not received any tax-free income during the year, a fact undisputed by both parties. Referring to previous judgments, including those from the Punjab & Haryana High Court and the Delhi High Court, the Tribunal held that no disallowance could be made in the absence of taxable income. The Tribunal emphasized that Rule 8D of the Income Tax Rules is a method to compute disallowance under section 14A, but its application is subject to the provisions of the Act. Therefore, the appeal of the assessee was allowed based on the precedent set by the earlier judgments.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeal as no tax-free income was earned during the relevant assessment year, and thus, no disallowance under section 14A of the Income Tax Act could be justified.