2018 (11) TMI 1415 - AT - Income Tax

Disallowance u/s 14A - Held that - Section 14A of the Act can be triggered only if assessee seeks to square off expenditure against the income which does not form part of total income under the Act and Section 14A of the Act cannot be invoked where no exempt income was earned in the relevant assessment years. In consonance with the judicial precedents, we do not see any infirmity in the conclusion drawn by the CIT(A) for non-applicability of Section 14A of the Act in the facts of the case. Action of the CIT(A) in granting relief on the disallowance (suo moto made by the assessee) beyond the return of income and in the absence of any formal revised return - Held that - Mere admission on the part of the assessee with respect to an addition/disallowance in its original return or in revised return would not ipso facto bar an assessee from claiming an expense or disputing an addition if it is otherwise permissible under law. It is thus well settled that if a particular income is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. The Revenue authorities cannot enforce untenable actions of the assessee against it which led to declaration of income of higher amount incorrectly. It is thus open to assessee to show that it was over assessed in correctly owing to its own mistake. No potency in the argument laid on behalf of the Revenue that the CIT(A) allegedly committed error in granting total relief in the matter of disallowance u/s 14A. In our considered view, the action of the CIT(A) in granting relief under s.14A on account suo moto disallowance by the assessee and thereby granting relief higher than claimed in the return of income cannot be faulted in law. Appeal of the Revenue is dismissed.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act when no exempt income was earned.
2. Granting relief on disallowance made by the assessee beyond the return of income.

Analysis:

Issue 1: Disallowance under Section 14A when no exempt income was earned
The primary issue in the Revenue's appeal was the correctness of the CIT(A)'s decision to delete the disallowance under Section 14A of the Act. The AO had disallowed expenses invoking Section 14A, even though no exempt income was earned by the assessee. The CIT(A) granted relief based on judicial precedents, including the decision of the Hon'ble Supreme Court in CIT vs. Chettinad Logistics. The Tribunal noted that various High Courts had disagreed with the CBDT Circular requiring disallowance even without exempt income. The Tribunal upheld the CIT(A)'s decision, stating that Section 14A can only be invoked when the expenditure is sought to be set off against income not forming part of the total income, and not when no exempt income was earned.

Issue 2: Granting relief on disallowance made by the assessee beyond the return of income
The second issue raised by the Revenue was regarding the CIT(A)'s decision to grant relief on the disallowance made by the assessee beyond the return of income. The CIT(A) held that the mistake of the assessee in offering non-taxable income for tax would not estop the assessee from claiming legitimate expenses. The Tribunal endorsed the CIT(A)'s view, citing various judgments emphasizing that the authorities must collect only legitimate tax dues. The Tribunal concluded that the CIT(A) was justified in granting relief on the disallowance made by the assessee, even beyond the return of income, as the authorities are obligated to assess the correct income.

In conclusion, the Tribunal dismissed the Revenue's appeal in both instances, upholding the CIT(A)'s decisions to delete the disallowances under Section 14A and to grant relief on the disallowances made by the assessee beyond the return of income. The judgments and legal principles cited in the analysis supported the Tribunal's conclusions, emphasizing the importance of assessing only legitimate tax dues and allowing the assessee to rectify mistakes in income declarations.