2017 (11) TMI 1953 - AT - Income Tax

Disallowance u/s 14A - investments are made for the strategic purposes in - the associate and group companies to take over the control/management - whether the AO was right in disallowing expenditure incurred in relation to exempt income even though the assessee has not earned any exempt income for the year under consideration? - HELD THAT - A similar issue has been considered by the co-ordinate bench in assessee s own case for the assessment year 2010-11. The co-ordinate bench, after considering the relevant provisions and also relying upon the decision of Hon ble Delhi High Court in the case of CIT vs Chemivest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT held that no disallowance u/s 14A can be made if there is no exempt income earned during the year. The co-ordinate bench further observed that there would be no adjustment of disallowance u/s 14A can be made on this score in the book profit u/s 115JB. We are of the view that there cannot be any disallowance u/s 14A r.w.r. 8D, if there is no exempt income earned during the relevant financial year. Therefore, we direct the AO to delete addition made u/s 14A r.w.r. 8D of I.T. Rules, 1962. We direct the AO to restrict disallowance u/s 14A to the extent of exempt income earned by the assessee. - Decided in favour of assessee.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act for assessment years 2012-13 and 2013-14.
- Whether disallowance of expenditure u/s 14A is applicable when no exempt income is earned.
- Limitation on disallowance u/s 14A concerning the amount of exempt income earned.

Analysis:
1. The appeals were filed against orders of the CIT(A) for the assessment years 2012-13 and 2013-14, concerning disallowance under section 14A. The appeals were heard together due to identical facts and issues.

2. The assessee contested the disallowance of expenses under section 14A for strategic investments in associate and group companies. The CIT(A) upheld the AO's disallowance, citing judicial precedents. The assessee argued no exempt income was earned, hence no disallowance should apply.

3. The ITAT considered whether disallowance u/s 14A is justified without exempt income. Referring to a similar case, it was held that if no exempt income is earned, no disallowance is warranted. The decision of the Delhi High Court was crucial in this determination.

4. For the assessment year 2013-14, where some exempt income was earned, the disallowance was limited to the amount of exempt income. The ITAT relied on previous decisions and the Delhi High Court's stance on the proportionality of disallowance to exempt income.

5. Ultimately, the ITAT allowed the appeal for the assessment year 2012-13 and partly allowed the appeal for 2013-14, directing the AO to delete the disallowance u/s 14A when no exempt income is earned and to restrict disallowance to the extent of exempt income earned. The judgment was pronounced on November 8, 2017.