2019 (1) TMI 1569 - AT - Income Tax

Disallowance u/s. 14A - no exempt income has been earned during the year - HELD THAT - The issue in present ground with respect to disallowance u/s. 14A of the Act. It is an undisputed fact that on the investment made by the assessee, no exempt income has been earned during the year. We find that in the case of CIT Vs. Cortech Energy P. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT has held that when there is no claim for exempt income, Section 14A would have no application. We also find that Hon ble Delhi High Court in the case of CIT Vs. Holcim India P. Ltd. (2014) 90 CCH 81 (Delhi) has held that where no dividend income was earned by assessee, disallowance u/s. 14A is not warranted. Further the Balance Sheet of assessee reveals that the availability of interest free funds in the form of Share Capital and Reserves and Surplus is much more than the investment held by the assessee. Also see HDFC BANK LTD. VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX-2 (3) , MUMBAI OTHERS 2016 (3) TMI 755 - BOMBAY HIGH COURT - in the present case no disallowance u/s. 14A us caked for. Thus, the grounds of appeal of assessee is allowed

Summary

Issues:
Disallowance of expenses under section 14A r.w.r. 8D for A.Y. 2012-13.

Analysis:

1. The appeal filed by the assessee challenges the order of the Commissioner of Income-Tax (A)-I, Raipur for the assessment year 2012-13. The assessee, a company engaged in trading iron and steel products, declared a total income of ?86,43,670. The assessment under section 143(3) resulted in a total income of ?1,26,60,910, leading to a disallowance of ?40,17,237 on account of inadmissible expenses under section 14A r.w.r. 8D. The CIT(A) upheld the disallowance, prompting the current appeal before the ITAT Raipur.

2. The crux of the issue lies in the applicability of section 14A, which disallows expenses in relation to income not forming part of the total income. The assessee contended that no exempt income was earned during the year, thus challenging the disallowance. The CIT(A) upheld the disallowance, emphasizing that the section does not require the exempt income to be earned during the relevant financial year. The CIT(A) also rejected the claim that the investments were made for business expediency, stating that section 14A does not differentiate between investments made for business reasons or otherwise.

3. During the ITAT hearing, the assessee reiterated that since no exempt income was earned, no disallowance under section 14A should apply. The assessee argued that the interest-free funds available in the form of Share Capital and Reserves and Surplus exceeded the investments, warranting no disallowance of interest. The Departmental Representative supported the lower authorities' orders, emphasizing the lack of proof regarding the source of funds used for investments.

4. The ITAT, after considering the submissions and precedents, noted that when no claim for exempt income exists, section 14A does not apply. Citing judgments by various High Courts, including Gujarat and Delhi, the ITAT emphasized that where no exempt income was earned, disallowance under section 14A was unwarranted. Referring to the Balance Sheet, the ITAT observed that the availability of interest-free funds exceeded the investments, aligning with the principle established in previous judgments.

5. Noting the absence of contrary binding decisions or challenges to the cited precedents, the ITAT concluded that no disallowance under section 14A was justified in the current case. Consequently, the ITAT allowed the grounds of appeal raised by the assessee, resulting in the appeal being allowed in favor of the assessee.

In conclusion, the ITAT Raipur ruled in favor of the assessee, holding that no disallowance under section 14A was warranted due to the absence of any exempt income earned during the year and the availability of interest-free funds exceeding the investments, aligning with established legal precedents.