2020 (2) TMI 1438 - AT - Income Tax

Addition u/s 14A - AO was of the view that u/s. 14A expenditure incurred to earn exempt income should be disallowed - HELD THAT - In the case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT and in light of the admitted factual position that the assessee did not earn any exempt income during the relevant previous year the disallowance of expenses u/s. 14A was rightly deleted by the CIT(Appeals). High Court of Delhi in the case of Prl. CIT Vs. IL FS Energy Development Co. Ltd. . 2017 (8) TMI 732 - DELHI HIGH COURT ) has held that CBDT Circular upon which extensive reliance is placed by revenue does not refer to rule 8D(1) at all. but only refers to the word includible occurring in the title to rule 8D as well as the title to section 14A. Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year s income for the disallowance to be triggered. The Court held that the process of interpretation adopted by the CBDT will be a truncated reading of section 14A and rule 8D particularly when rule 8D(1) uses the expression such previous year . Further it does not account for the concept of real income . It does not note that under section 5 the question of taxation of notional income does not arise. For all of the aforementioned reasons the Court held that the CBDT Circular dated 11.5.2014 cannot override the express provisions of section 14A read with rule 8D. - Decided against revenue.

Summary

Issues: Whether the CIT(Appeals) was justified in deleting the disallowance made under section 14A of the Income-tax Act, 1961.

The case involved an appeal by the revenue against an order related to the assessment year 2016-17. The main issue was whether the CIT(Appeals) was correct in deleting the disallowance of a significant sum made by the Assessing Officer (AO) under section 14A of the Act. The assessee, a company engaged in the generation and distribution of hydro-electric power, had investments in subsidiary companies but did not earn any tax-free dividend income from these investments. The AO disallowed expenses under section 14A r.w. Rule 8D of the Rules, leading to a substantial amount being disallowed. The AO relied on a CBDT Circular stating that disallowance under section 14A must be made even if no exempt income was earned. The assessee contended that without earning any dividend income, no disallowance should be made under section 14A.

The CIT(Appeals) deleted the disallowance, citing a decision of the Delhi High Court that no disallowance under section 14A should be made if no exempt income was earned. The revenue, aggrieved by this decision, appealed to the Tribunal. During the proceedings, the revenue relied on the AO's order and the CBDT Circular mentioned by the AO. The Tribunal considered the submissions and referred to the Delhi High Court's decision in Cheminvest Ltd. case, which held that in the absence of exempt income, no disallowance under section 14A should be made. Additionally, the Tribunal highlighted another Delhi High Court case, Prl. CIT Vs. IL & FS Energy Development Co. Ltd., which emphasized that the CBDT Circular could not override the express provisions of section 14A and rule 8D. The Tribunal concluded that the disallowance of expenses under section 14A was rightly deleted by the CIT(Appeals) in this case, dismissing the revenue's appeal.

In summary, the Tribunal upheld the CIT(Appeals)' decision to delete the disallowance under section 14A, emphasizing that the absence of exempt income meant no disallowance should be made. The Tribunal referenced relevant case law to support its decision and rejected the revenue's appeal, finding no merit in it.