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2021 (5) TMI 240 - AT - Income TaxDisallowance u/s 14A r.w. Rule 8D - HELD THAT - Undisputedly, the assessee has no exempt income in this year. The CIT(A) has relied upon the decision of Cheminvest Ltd. Vs. ITO 2015 (9) TMI 238 - DELHI HIGH COURT and others which has been mentioned in the order. Moreover, we noticed that the case of the assessee has duly been covered by the assessee own case for the A.Y.2011-12 by CIT(A) where there is no exempt income, there should be no disallowance u/s 14A r.w. Rule 8D of the Rule. The CIT(A) has passed the order judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, these issues are decided in favour of the assessee against the revenue.
Issues Involved:
1. Deletion of disallowance under Section 14A of the Income Tax Act, 1961. 2. Applicability of Rule 8D of the Income Tax Rules, 1962. 3. Interpretation of CBDT Circular No. 5/2014. 4. Requirement of exempt income for disallowance under Section 14A. Issue-wise Detailed Analysis: 1. Deletion of Disallowance under Section 14A: The primary issue raised by the revenue was whether the CIT(A) was right in deleting the disallowance under Section 14A of the Income Tax Act, 1961. The revenue contended that the CIT(A) erroneously deleted the disallowance of ?3,00,49,824/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The AO had disallowed this amount on the grounds that the assessee had incurred significant interest expenditure on borrowed funds and other expenses, which were attributable to investments capable of generating exempt income in the future. Despite the assessee not earning any exempt income during the relevant assessment year, the AO proceeded with the disallowance based on the potential of future income generation. 2. Applicability of Rule 8D: The AO invoked Rule 8D to compute the disallowance under Section 14A, arguing that the assessee's computation was incorrect. The AO's stance was that the investments made by the assessee had the potential to earn exempt income, and thus, the expenses related to such investments should be disallowed. The CIT(A), however, held that since no exempt income was earned during the year, no disallowance under Section 14A was warranted. The CIT(A) relied on various judicial precedents, including the Bombay High Court's decision in the case of Godrej & Boyce Manufacturing Co. Ltd., which supported the view that disallowance under Section 14A cannot exceed the exempt income earned. 3. Interpretation of CBDT Circular No. 5/2014: The revenue argued that the CIT(A)'s decision was contrary to CBDT Circular No. 5/2014, which clarified that disallowance under Section 14A read with Rule 8D can be made even if no exempt income is earned in a particular year. The CIT(A), however, did not find this circular persuasive in the context of the judicial precedents that held otherwise. The CIT(A) emphasized that the absence of exempt income during the relevant year negated the applicability of Section 14A disallowance. 4. Requirement of Exempt Income for Disallowance under Section 14A: The CIT(A) and various judicial pronouncements, including those from the Bombay High Court, have consistently held that disallowance under Section 14A is not warranted in the absence of exempt income. The CIT(A) cited several cases, such as PCIT Vs. Rivian International Pvt. Ltd., Zee News Ltd., and Cheminvest Ltd. Vs. ITO, to reinforce this position. The CIT(A) also noted that in the assessee's own case for the previous assessment year (2011-12), a similar disallowance was deleted due to the absence of exempt income. Conclusion: The Tribunal upheld the CIT(A)'s order, concluding that the disallowance under Section 14A read with Rule 8D was not justified in the absence of exempt income. The Tribunal found that the CIT(A) had judiciously and correctly applied the law, relying on established judicial precedents. Consequently, the revenue's appeal was dismissed, and the CIT(A)'s decision to delete the disallowance of ?3,00,49,824/- was affirmed. Order Pronouncement: The appeal filed by the revenue was dismissed, and the order was pronounced in the open court on 07/04/2021.
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