2019 (1) TMI 1723 - HC - Income Tax

Disallowance u/s 14A - expenditure incurred in relation to the income not includible in total income - as urged that in the absence of any actual dividend income earned by the assessee during the year in question there was no question of any disallowance of debenture interest and finance charges to be made u/s 14A - HELD THAT -There is no merit in this appeal filed by the Revenue and the entire edifice of the argument of the Revenue is without any foundation. The assessing authority misapplied the provisions of section 14A of the Act which in clear terms stipulates that no deduction can be allowed in respect of expenditure incurred in relation to income which does not form part of total income under the Act. In view of the clear fact found in the present case that the assessee did not earn any exempted income or dividend income on the equity shares held by it during this year there was no question of disallowing any part of the debenture interest or finance charges since the provisions under section 14A of the Act were not attracted at all. - Decided in favour of assessee

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act, 1961.
2. Applicability of section 14A when no exempt income is earned.
3. Relevance of the Supreme Court's judgment in Maxopp Investment Ltd. v. CIT.

Detailed Analysis:

1. Disallowance under section 14A of the Income-tax Act, 1961:
The primary issue in this case revolves around the disallowance of expenditure under section 14A of the Income-tax Act, 1961. The assessee-company had invested Rs. 137 crores in equity shares and incurred debenture interest and finance charges amounting to Rs. 6,46,21,000. The assessing authority disallowed the entire amount on the premise that the investment was made from borrowed funds, invoking section 14A, which states that no deduction shall be allowed for expenditure incurred in relation to income not includible in total income.

2. Applicability of section 14A when no exempt income is earned:
The court noted that the controversy is covered by previous judgments, specifically CIT v. Chettinad Logistics P. Ltd. and Redington (India) Ltd. v. Addl. CIT. These cases established that section 14A disallowance cannot be made unless exempt income is actually earned during the assessment year. The court emphasized that the provision applies only if there is exempt income during the year in question. Since the assessee did not earn any dividend income in the relevant year, section 14A could not be invoked. The court highlighted that the assessing authority misapplied section 14A, as no exempt income was earned, and thus, no expenditure could be disallowed.

3. Relevance of the Supreme Court's judgment in Maxopp Investment Ltd. v. CIT:
The Revenue relied on the Supreme Court's judgment in Maxopp Investment Ltd. v. CIT to argue that disallowance was justified. However, the court distinguished the facts of the present case from Maxopp. In Maxopp, the shares were held as stock-in-trade for gaining control over the investee company, and the dominant intention was to earn dividends. In contrast, the present case involved no such intention or facts. The court reiterated that the judgments in Chettinad Logistics and Redington (India) Ltd. were more applicable, as they dealt directly with the issue of not earning exempt income during the assessment year.

Conclusion:
The court concluded that the appeal filed by the Revenue lacked merit, as the provisions of section 14A were misapplied. The substantial question of law was answered in favor of the assessee, stating that without earning exempt income, the disallowance under section 14A could not be made. The appeal was dismissed with no order as to costs.

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