2016 (6) TMI 1077 - AT - Income Tax

Disallowance u/s 14A - Held that - Respectfully following the decision of Tribunal in assessee company s own case in immediately preceding assessment year 2009-10 whereby the issues were decided in favour of the assessee company as set out above , we also hold that no disallowance u/s 14A of the Act is called for , once there is no exempt income received or receivable by the assessee company during the relevant previous year. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Applicability of Section 14A when no exempt income is earned.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The assessee company, engaged in construction and real estate, made investments amounting to ?55,12,50,000 and incurred ?2.49 crores as interest on loans. The AO observed that the assessee did not disallow any expenses under Section 14A, despite auditors reporting ?80,10,897 as expenditure related to income not forming part of total income. The AO argued that investment decisions require substantial research and management, thus incurring significant expenses. The AO calculated the disallowance under Section 14A read with Rule 8D, amounting to ?80,10,897, referencing the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT and the ITAT Special Bench decision in Cheminvest Ltd. v. ITO.

2. Applicability of Section 14A when no exempt income is earned:
The assessee contended that since no exempt income was earned from the investments in its 100% subsidiary, Section 14A should not apply. The CIT(A) dismissed the appeal, relying on the Special Bench decision in Cheminvest Ltd., which held that disallowance under Section 14A applies even if no exempt income is earned. However, the Tribunal noted that the Delhi High Court in Cheminvest Ltd. v. CIT overruled the ITAT Special Bench decision, stating that no disallowance under Section 14A is warranted if no exempt income is earned. The Tribunal also referenced its own decision in the assessee's case for the previous year, which followed the Delhi High Court's ruling.

Consequently, the Tribunal held that no disallowance under Section 14A is warranted for the relevant assessment year as no exempt income was received or receivable by the assessee. The appeal filed by the assessee was allowed, and the disallowance of ?80,10,897 was overturned.

Conclusion:
The Tribunal concluded that Section 14A disallowance is not applicable when no exempt income is earned, aligning with the Delhi High Court's decision in Cheminvest Ltd. v. CIT. The appeal by the assessee was allowed, and the disallowance of ?80,10,897 was reversed.