2018 (8) TMI 671 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - expenditure towards exempted income i.e. Dividend income - revenue contended that assessee cannot earn dividend income without systematic management and that dividend income can be earned by incurring no or nominal expenditure - Assessee contended that it has not received any dividend or exempted income during the relevant year - Held that - The learned CIT(A) has given relief to the assessee based upon the proposition that if no exempt income has been received during the relevant year, no disallowance can be made u/s. 14A of the Act. If no exempt income is received during the previous year relevant to the impugned assessment year, no disallowance of expenditure u/s 14A of the Act of 1961 is warranted. - Decided against the revenue.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(iii) of the Income Tax Rules.
2. Applicability of CBDT Circular No. 5/2014 dated 11/02/2014.
3. Precedential value of judicial decisions when no exempt income is earned.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(iii) of the Income Tax Rules:
The primary issue was whether disallowance under Section 14A read with Rule 8D(iii) is applicable when no exempt income is earned by the assessee during the relevant assessment year. The assessee had made substantial investments but did not earn any exempt income such as dividends. The Assessing Officer (AO) disallowed an amount of ?6,87,36,432/- purportedly related to earning exempt income, despite the absence of such income. The CIT(A) deleted the disallowance, relying on the Delhi High Court's decision in Holcim India Private Limited, which held that Section 14A cannot be invoked when no exempt income is earned. The Tribunal upheld this view, affirming that no disallowance under Section 14A is warranted in the absence of exempt income.

2. Applicability of CBDT Circular No. 5/2014 dated 11/02/2014:
The AO relied on CBDT Circular No. 5/2014, which clarified that disallowance under Section 14A is applicable even if no exempt income is earned. However, the Tribunal noted that this circular does not override judicial precedents, particularly the Delhi High Court's decision in Cheminvest Ltd. v. CIT, which held that disallowance under Section 14A is not permissible without exempt income. The Tribunal emphasized that the legal position laid down by the courts takes precedence over the CBDT circular.

3. Precedential value of judicial decisions when no exempt income is earned:
The Tribunal relied on its own decisions in the assessee's cases for earlier years (AY 2010-11 and AY 2011-12), where it was held that no disallowance under Section 14A is warranted if no exempt income is earned. The Tribunal also referred to other judicial decisions, including those of the Delhi High Court and the Bombay High Court, which consistently held that disallowance under Section 14A is not applicable when no exempt income is earned. The Tribunal further noted that the Hon'ble Supreme Court dismissed the Revenue's SLP in the case of CIT v. Chettinad Logistics P. Ltd., affirming the principle that no disallowance under Section 14A is warranted in the absence of exempt income.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance under Section 14A. The Tribunal upheld that no disallowance is warranted under Section 14A when no exempt income is earned during the relevant assessment year, following consistent judicial precedents and the principle of consistency. The Tribunal's decision reinforces that judicial interpretations take precedence over administrative circulars in the application of tax laws.

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