2019 (8) TMI 150 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D(2)(iii) - no exempt income had been earned or received by the assessee - HELD THAT - In the case on hand admittedly, the factual position was that the assessee had not earned or received any exempt income in the previous year relevant to assessment year 2013-14. In these circumstances, in our considered view, the ratio of the decision of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT would apply squarely in the case on hand. The Hon ble High Court in the aforesaid judgement held that no disallowance under section 14A of the Act could be made in a year in which no exempt income had been earned or received by the assessee. It was held that the expression does not form part of the total income in section 14A envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous years for the purpose of disallowing any expenditure incurred in relation to the said exempt income. - Decided in favour of assessee.

Summary

Issues:
Disallowance under section 14A r.w.Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Rules for Assessment Year 2013-14 based on no exempt income earned by the assessee.

Analysis:

Issue 1: Disallowance under section 14A r.w.Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Rules

The case involved an appeal by the assessee against the order of CIT(A) for Assessment Year 2013-14, where the disallowance under section 14A r.w.Rule 8D(2)(ii) and 8D(2)(iii) of the Rules was upheld. The assessee, engaged in deputing professionals for computer-related software services, ITES, and placement services, had filed a revised return declaring a loss. The disallowance was made by the assessing officer under section 14A due to the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii). The assessee contended that since no exempt income was earned, the provisions of section 14A should not apply. The appellate tribunal, after considering the contentions and judicial precedents cited, observed that the provisions of section 14A apply to expenditure related to earning income not includible in total income. As no exempt income was earned or received by the assessee during the relevant previous year, the tribunal relied on judicial precedents, including the decision of the Hon’ble Delhi High Court in Cheminvest Ltd. vs. CIT, to hold that no disallowance under section 14A could be made in the absence of exempt income. Consequently, the tribunal directed the assessing officer to delete the disallowance under section 14A for the assessment year 2013-14, allowing the assessee's appeal.

In conclusion, the tribunal allowed the assessee's appeal for Assessment Year 2013-14, emphasizing that no disallowance under section 14A of the Act could be made when no exempt income had been earned or received by the assessee during the relevant year. The tribunal's decision was based on the absence of exempt income, as per the provisions of section 14A, and supported by judicial precedents, including the decision of the Hon’ble Delhi High Court in Cheminvest Ltd. vs. CIT.