2021 (3) TMI 1423 - HC - Income Tax

Addition u/s 14A r/w rule 8D - mandation of earning of any income which is exempted from tax - HELD THAT - As no dividend or exempt income was claimed by the assessee during the relevant previous year. It is well settled in law that if no exempt income has accrued to the assessee, the provisions of Section 14A do not apply to the fact situation of the case. See M/S STERLING DEVELOPERS PVT. LTD 2021 (3) TMI 1422 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act for Assessment Years 2010-11, 2011-12, and 2014-15.
2. Interpretation of Circular No. 05/2014 dated 11.02.2014 regarding disallowances under Section 14A.
3. Application of Section 14A when no exempt income is claimed.

Analysis:
1. The judgment pertains to disallowances under Section 14A of the Income Tax Act for the Assessment Years 2010-11, 2011-12, and 2014-15. The Tribunal had allowed the appeals in respect of these assessment years. The court framed a substantial question of law regarding the justification of deleting the disallowances made under Section 14A. The court referred to a similar judgment in ITA No. 658/2015 for the Assessment Year 2009-10, where the Tribunal had deleted disallowances under Section 14A. The court analyzed the facts of the case, including the return of income filed by the assessee, assessment proceedings, and the orders passed by the Commissioner of Income Tax (Appeals) and the Tribunal.

2. The court considered the interpretation of Circular No. 05/2014 dated 11.02.2014, emphasizing that only expenditure related to the earning of income should be allowed. The court examined whether expenses related to earning exempt income should be considered for disallowance, regardless of whether such income was earned during the financial year. The court reviewed the arguments presented by the counsel for the revenue and the assessee, focusing on the reasoning recorded by the Assessing Officer and the findings of the Tribunal. The court cited precedents and ultimately ruled in favor of the assessee, stating that if no exempt income accrued, Section 14A does not apply.

3. The judgment also addressed the application of Section 14A when no exempt income is claimed. The court noted that the assessee had taken a specific stand that no income exempt from tax was earned during the relevant previous year. The Tribunal concurred with this position, leading to the setting aside of the disallowance under Section 14A. The court referred to previous decisions supporting the view that if no exempt income is claimed, Section 14A does not apply. Consequently, the court dismissed the appeal, aligning with the findings in the earlier judgment for the Assessment Year 2014-15. The court concluded that the question of law had already been answered against the revenue in favor of the assessee, resulting in the dismissal of the appeal for the other assessment years as well.