2018 (2) TMI 1279 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - proof of having any exempt income - Held that - In the present case, it is an admitted fact that the assessee was not having any exempt income which is evident from para 3.2.4 of the impugned order passed by the learned CIT(A) wherein it has been categorically stated that the assessee company had not earned any exempt income during the year. The said observation of the learned CIT(A) was not rebutted. As decided in Cheminvest Ltd. Vs CIT-IV 2015 (9) TMI 238 - DELHI HIGH COURT section 14A will not apply if no exempt income is received or receivable during the relevant previous year. In the present case also no exempt income was claimed by the assessee therefore, the disallowance made by the AO u/s 14A of the Act was rightly deleted by the learned CIT(A). - Decided in favour of assessee

Issues Involved:
1. Justification of the deletion of ?1,90,46,924/- addition under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.
2. Whether the provisions of Section 14A are applicable in the absence of exempt income.

Issue-wise Detailed Analysis:

1. Justification of the deletion of ?1,90,46,924/- addition under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules:

The Department appealed against the CIT(A)'s order deleting the addition of ?1,90,46,924/- made by the AO under Section 14A read with Rule 8D. The AO had made this disallowance on the grounds that the assessee had investments in mutual funds and equity shares, which could generate exempt income (dividends). The AO contended that some administrative and managerial expenses must have been incurred to manage these investments, thus warranting the application of Rule 8D to calculate the disallowance.

The assessee argued that no expenses were incurred to earn exempt income and no such income was earned during the relevant year. The CIT(A) accepted this argument, noting that the investments were primarily in a wholly-owned subsidiary and a joint venture, and were made to obtain a controlling stake rather than to earn dividends. The CIT(A) also pointed out that the AO did not satisfy the conditions under Section 14A(2) before applying Rule 8D, as there was no exempt income earned during the year.

2. Whether the provisions of Section 14A are applicable in the absence of exempt income:

The CIT(A) and the Tribunal both noted that the assessee did not earn any exempt income during the relevant year. The CIT(A) referred to legal precedents, including the jurisdictional High Court's decision in Holcim India Pvt. Ltd., which held that no disallowance under Section 14A can be made if no exempt income is earned. The Tribunal also cited the case of Cheminvest Ltd. vs. CIT-IV, where the Delhi High Court ruled that Section 14A would not apply if no exempt income is received or receivable during the relevant previous year.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?1,90,46,924/- made by the AO under Section 14A read with Rule 8D, on the grounds that the assessee did not earn any exempt income during the relevant year. The appeal by the Department was dismissed, affirming that the provisions of Section 14A are not applicable in the absence of exempt income. The Tribunal emphasized that the AO must first examine the accounts and be dissatisfied with the claim before resorting to Rule 8D, which was not done in this case. The judgment reinforces the principle that disallowance under Section 14A is not justified without actual receipt of exempt income.

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