2022 (7) TMI 1162 - HC - Income Tax

Disallowance u/s14A read with Rule 8D(iii) - ITAT made deletion of the disallowance made under Section 14A of the Act by relying upon circular no. 5/2014 dated 11th February, 2014 - HELD THAT - The said challenge of the department cannot be accepted in view of the judgment of this Court in Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT wherein Court answers the questions framed by holding that the expression does not form part of the total income in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. The aforesaid judgment has held field since 2015 and has been consistently applied by the ITAT and followed by this Court in all subsequent matters. ITAT admitting additional ground raised by the assessee regarding the treatment of subsidy - HELD THAT - No error was committed by the ITAT by permitting the assessee to raise the additional ground at the stage of the appeal because there is no dispute raised by the department to the fact that the said subsidy given by State of Jammu Kashmir to the assessee is liable to be treated as a capital receipt in view of the judgment of Shri Balaji Alloys 2011 (1) TMI 394 - JAMMU AND KASHMIR HIGH COURT

Summary

Issues:
1. Delay in filing the appeal.
2. Addition made by Assessing Officer under Section 14A of the Income Tax Act.
3. Treatment of subsidy received from the State of Jammu & Kashmir.
4. Claim of education cess as an allowable expenditure.

Analysis:
1. The delay of 40 days in filing the appeal was condoned by the High Court based on the application made by the appellant.

2. The Assessing Officer made an addition of Rs. 2,50,000 under Section 14A of the Income Tax Act during the assessment proceedings. The appellant opposed this addition, arguing that no exempt income was earned during the relevant assessment year, thus no disallowance was warranted. The CIT(A) upheld the addition, but the ITAT set it aside, citing that no exempt income was earned, and the circular relied upon by the AO could not override the Act's provisions. The ITAT also allowed the claim of education cess as an allowable expenditure based on relevant judgments and circulars.

3. The appellant raised an additional ground regarding the subsidy received from the State of Jammu & Kashmir, claiming it should be treated as a capital receipt, not a revenue receipt. The ITAT permitted this additional ground, considering the legislative intent and relevant judgments. The ITAT relied on the judgment of the High Court of Jammu and Kashmir in a similar case and allowed the subsidy to be treated as a capital receipt, following the principle established in that case.

4. The ITAT granted various reliefs to the appellant, including deleting the disallowance under Section 14A, permitting the treatment of the subsidy as a capital receipt, and allowing the deduction of education cess as an allowable expenditure. The High Court dismissed the department's appeal challenging the ITAT's order, as the judgments and principles cited by the ITAT were found to be valid and no substantial questions of law arose for consideration.