2017 (3) TMI 1319 - AT - Income Tax

Disallowance made u/s 14A - whether the assessee has not earned any exempt income during the relevant Assessment Year? - Held that - The investments were made purely on account of commercial necessity and as no exempt income was earned from the investment so made, the provisions of Section 14A will not applicable to the case of assessee. CIT(A) has not erred in deleting the disallowance made under Section 14A of I.T. Act holding that the assessee has not earned any exempt income during the relevant Assessment Year. - Decided in favour of assessee

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act.
2. Commercial expediency in borrowing funds for investment.
3. Applicability of Section 14A when no exempt income is earned.

Issue 1: Disallowance under Section 14A of the Income Tax Act:
The Revenue challenged the order of the CIT(A) concerning the disallowance made under Section 14A of the Income Tax Act for the Assessment Year 2012-13. The assessee, an HUF, had claimed a deduction of interest paid towards loans against income under the head 'income from other sources'. The Assessing Officer disallowed the interest expenditure claimed by the assessee, amounting to ?1,20,04,439, as the borrowed money was invested in share application money, which would eventually earn dividends exempt from taxation. The Revenue contended that since the investment was made in share application money, the claim of deduction of interest expenditure was not allowable under Section 14A. The CIT(A), however, relying on the decision in the assessee's own case for AY 2011-12, deleted the disallowance made by the AO under Section 14A.

Issue 2: Commercial expediency in borrowing funds for investment:
The assessee argued before the CIT(A) that the funds were borrowed due to commercial expediency as the company had incurred significant losses, leading to a cash crunch situation. The infusion of liquidity in the form of share application money was necessary to prevent the company from ceasing operations and protect the investments of family members and itself. The CIT(A) accepted this argument based on the commercial necessity of borrowing funds for investment, leading to the deletion of the disallowance under Section 14A.

Issue 3: Applicability of Section 14A when no exempt income is earned:
The ITAT Hyderabad upheld the order of the CIT(A) by relying on various case laws and precedents. The ITAT referred to decisions where it was established that Section 14A of the Act could only be invoked when expenditure is incurred for earning income that does not form part of the total income. Since the assessee had not earned any exempt income from the investments made, the provisions of Section 14A were deemed not applicable. The ITAT highlighted judgments from different High Courts emphasizing that unless the assessee had earned exempt income in a particular financial year, the provisions of Section 14A would not apply. Therefore, the ITAT dismissed the appeal of the Revenue, affirming the decision of the CIT(A) regarding the non-applicability of Section 14A due to the absence of exempt income.

This detailed analysis of the legal judgment highlights the key issues involved, the arguments presented by the parties, and the rationale behind the final decision rendered by the ITAT Hyderabad.