2020 (8) TMI 269 - AT - Income Tax

Disallowance u/s. 14A - assessee has not earned any exempt income during the year - HELD THAT - It is undisputed fact that the assessee has not earned any exempt income during the year and therefore, no additional disallowance u/s 14A could be made by revenue authorities. The said position is well-settled by catena of binding decisions. The Hon ble Bombay High Court in its recent decision of Pr. CIT Vs. Huntsman International (India) Pvt.Ltd. 2019 (2) TMI 1457 - BOMBAY HIGH COURT hold that where there is no exempt income earned by the assessee, no disallowance u/s 14A could be made. - Decided in favour of assessee.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act, 1961 without earning exempt income

Analysis:
1. The appeal by the revenue contested the order of the Commissioner of Income Tax (Appeals) regarding the disallowance under section 14A of the Income Tax Act, 1961 for the Assessment Year 2013-14. The grounds of appeal raised various legal questions, including the interpretation of CBDT Circular No. 5 of 2014 and the necessity of earning exempt income for disallowance under section 14A.

2. The assessee filed a cross-objection challenging the disallowance made by the Assessing Officer under section 14A without establishing a nexus between expenses and exempt income. The cross-objection also raised concerns about the disallowance under section 14A affecting the book profit under section 115JB of the Act.

3. The counsel for the assessee argued that the only issue in the appeal was the disallowance under section 14A, emphasizing that no exempt income was earned during the year. Citing various judicial precedents, the counsel contended that disallowance under section 14A cannot be made if no exempt income is earned, contrary to the revenue's position based on CBDT Circular No. 5 of 2014.

4. Upon considering the submissions and the material on record, it was noted that the assessee had not earned any exempt income during the year. Despite offering a suo-moto disallowance under section 14A in the return of income, the Assessing Officer applied Rule 8D to compute additional disallowance. This led to the appeal challenging the additional disallowance of ?178.44 Lacs.

5. The Commissioner (Appeals) deleted the additional disallowance based on judicial precedents, ruling that no disallowance under section 14A could be made if no exempt income was earned. The decision was supported by the Gujarat High Court and Bombay High Court judgments, leading to the current appeal by the revenue.

6. The Tribunal found that the assessee had not earned any exempt income during the year, aligning with established legal principles upheld by various High Court decisions. The recent Bombay High Court decision further reinforced this position, emphasizing that no disallowance under section 14A could be made in the absence of exempt income. Consequently, the revenue's appeal was dismissed.

7. The dismissal of the revenue's appeal rendered the consideration of the assessee's cross-objection irrelevant, leading to the dismissal of both the appeal and cross-objection.

This comprehensive analysis of the judgment highlights the legal intricacies surrounding the disallowance under section 14A of the Income Tax Act, emphasizing the requirement of earning exempt income for such disallowance to be applicable.