2021 (2) TMI 588 - HC - Income Tax

Disallowance u/s 14A - whether assessee has not determined the expenditure incurred in relation to exempt income and Assessing Authority has rightly held that even though there is no dividend income from the investment? - HELD THAT - As an admitted position that no dividend or exempt income was claimed by the assessee during the relevant previous year. It is well settled in law that if no exempt income has accrued to the assessee, the provisions of Section 14A do not apply to the fact situation of the case. The aforesaid view has been taken by this Court in 'PRL. COMMISSIONER OF INCOME TAX AND ANOTHER Vs. M/s. NOVELL SOFTWARE DEVELOPMENT (INDIA) PVT. LTD.' 2021 (2) TMI 145 - KARNATAKA HIGH COURT - substantial question of law framed in this appeal is answered against the revenue and in favour of the assessee.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Interpretation of Circular No.5/2014 regarding expenses related to earning exempt income.

Analysis:

Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961
The appeal pertained to the Assessment Year 2009-10 where the Assessing Officer made disallowances under Section 14A of the Act totaling to a significant amount. The Commissioner of Income Tax (Appeals) partly allowed the appeal and deleted some additions while sustaining others. The Tribunal dismissed the appeal by the revenue and partly allowed the appeal by the assessee. The revenue filed an appeal against the Tribunal's order. The revenue contended that the Assessing Officer's reasoning for disallowing the claim was valid and that the Tribunal's finding of no exempt income was incorrect. The assessee, on the other hand, argued that no exempt income was claimed during the relevant year and thus, Section 14A did not apply. The Court observed that the assessee had specifically stated that no exempt income was earned, which was undisputed. Based on this, the Court held that if no exempt income accrued, Section 14A did not apply, citing relevant case laws. Consequently, the substantial question of law was answered against the revenue and in favor of the assessee, leading to the dismissal of the appeal.

Issue 2: Interpretation of Circular No.5/2014
The substantial question of law also involved the interpretation of Circular No.5/2014, emphasizing that only expenses related to earning income should be considered for disallowance, regardless of whether the income was earned during the financial year. The Court's decision primarily focused on the absence of exempt income during the relevant year, which aligned with the principles outlined in the Circular. The Court referenced its previous decisions and those of Delhi and Madras High Courts to support its interpretation. Therefore, the Court's ruling in this case was consistent with the principles outlined in Circular No.5/2014, reinforcing that disallowances should be based on expenses related to earning income.

In conclusion, the Court's judgment centered on the absence of exempt income during the relevant year, leading to the dismissal of the revenue's appeal. The decision was based on the specific facts of the case and the principles outlined in Circular No.5/2014, emphasizing the importance of considering expenses related to earning income for disallowance under Section 14A of the Income Tax Act, 1961.