2021 (9) TMI 1125 - AT - Income Tax

Disallowance u/s 14A - expenditure incurred in earning the dividend income - HELD THAT - Revenue could not contradict the finding that the assessee has only earned exempt income to the tune of ₹ 148/-. The Revenue has also not rebutted the finding that no expenditure was incurred in earning for the dividend income. It is also contended that the Assessing Officer has not demonstrated the nexus between expenses incurred with the earning of the exempt income. The Hon'ble Supreme Court in the case of Godrej and Boyce Manufacturing Company Ltd. 2017 (5) TMI 403 - SUPREME COURT held that what cannot be denied is that the requirement for attracting the provisions of section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed had actually been incurred in earning the dividend income - Decided against revenue.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Application of Rule 8D of the Income Tax Rules for disallowance computation.
3. Judicial precedents on disallowance under section 14A.

Analysis:
1. The appeal involved the deletion of an addition of ?2,12,03,476 made under section 14A of the Income Tax Act for Assessment Year 2013-14. The Assessing Officer invoked section 14A and Rule 8D to compute the disallowance, which was later deleted by the CIT(A) as the assessee had earned only ?148 as exempt income without claiming any expenditure against it.

2. The Revenue contended that the disallowance was justified, citing precedents like CIT vs. Wolfort Share and Stock Brokers P. Ltd. and Maxopp Investment Vs. CIT. On the other hand, the assessee argued that no expenditure was incurred for earning the exempt income and relied on judgments like CIT vs. Rajendra Prasad Moody and Cheminvest Ltd. vs. CIT to support their stance.

3. The CIT(A) analyzed the case, emphasizing that for disallowance under section 14A, there must be a nexus between the expenditure and income not forming part of the total income. Referring to various court decisions, including CIT vs. I.P. Support Services India (P) Ltd. and Cheminvest Ltd vs. CIT, the CIT(A) concluded that the Assessing Officer failed to establish this nexus and mechanically computed the disallowance without proper reasoning.

4. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not challenge the fact that the assessee earned only ?148 as exempt income and did not incur any expenditure for it. Citing the Supreme Court's ruling in Godrej and Boyce Manufacturing Company Ltd. vs. DCIT, the Tribunal emphasized the necessity of proving that the disallowed expenditure was actually incurred in earning the dividend income, which was lacking in this case.

5. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the deletion of the disallowance under section 14A. The decision was pronounced after a Virtual Hearing on 21.09.2021.