2024 (7) TMI 1520 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D(2)(ii) (iii) - Expenditure incurred in relation to income not includible in total income - HELD THAT - We note from financial statements that the assessee has not received any exempt income during the year and therefore no disallowance could be made. This view is supported in the case of PCIT v. Delhi International Airport P. Ltd 2021 (5) TMI 1004 - KARNATAKA HIGH COURT wherein held only expenses proportionate to earning of exempt income could be disallowed u/s 14A and the decision of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of section 14A is to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The High Court of Madras has relied on the decision of the Supreme Court in Walfort Share and Stock 2010 (7) TMI 15 - SUPREME COURT wherein it has been held that Section 14A is relatable to income of actual income or not notional or anticipated income. Therefore, the conclusion arrived at by us in Novel Software India (P.) Ltd. 2021 (2) TMI 145 - KARNATAKA HIGH COURT is affirmed but for different reasons. It is also clarified by us that while recording the conclusion in Kingfisher Finvest Ltd. 2020 (10) TMI 518 - KARNATAKA HIGH COURT that disallowance under section 14A has to be made even taxpayer has not earned any exempt income, this court has misread the ratio of the decision of the Supreme Court in Maxopp Investment Ltd. supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent. In view of preceding analysis, the second substantial question of law is also answered against the revenue and in favour of the assessee. Against the above judgment, the revenue preferred SLP. Since both the parties could not bring the status of the case before the Hon ble Apex Court, therefore, respectfully following the judgement of the jurisdictional High Court PCIT v. Delhi International Airport P. Ltd. noted supra we allow the appeal of the assessee

Summary

Issues:
Disallowance u/s. 14A of the Act for AY 2017-18.

Detailed Analysis:
The appeal was filed by the assessee against the order of the CIT(Appeals) regarding disallowance u/s. 14A of the Act for the AY 2017-18. The assessee had declared income of Rs. 17,48,03,210 and was selected for scrutiny under CASS. The AO calculated disallowance under Rule 8D(2)(ii) and (iii) resulting in a total disallowance of Rs. 2,83,83,845. Additionally, a further disallowance of Rs. 43,60,609 towards interest on income tax refund was made. The CIT(Appeals) upheld the disallowance, leading to the appeal before the ITAT.

During the impugned year, the assessee had not made any fresh investments, and no exempt income was received. The assessee argued that since no exempt income was earned, no disallowance u/s. 14A could be made. The ITAT considered the facts and financial statements, noting that no exempt income was received during the year. The ITAT referred to a judgment of the jurisdictional High Court in a similar case, where it was held that disallowance under section 14A does not apply if no exempt income has accrued to the assessee. The ITAT, therefore, allowed the appeal of the assessee based on the precedent set by the High Court.

The ITAT's decision was supported by a detailed analysis of the legal provisions under Section 14A of the Act. The ITAT referred to a specific judgment of the High Court, highlighting that the provisions of Section 14A apply only when there is income not includible in the total income under the Act. The judgment emphasized that disallowance under Section 14A should be made only when there is actual income earned, not notional or anticipated income. The ITAT clarified that expenses proportionate to earning exempt income could be disallowed under Section 14A, and the provision aims to prevent claiming expenses against taxable income while availing tax incentives for exempt income without proper apportionment.

The ITAT's decision was further supported by a subsequent analysis of relevant case law and the interpretations of the Supreme Court's decisions. The judgment highlighted the distinction between shares held as stock-in-trade and those held for investment purposes, emphasizing that disallowance under Section 14A is linked to the actual earning of exempt income. The ITAT's decision was in line with the legal principles established by the High Court and the Supreme Court, ensuring that disallowance under Section 14A is justified only when there is actual income earned, not merely anticipated income.

In conclusion, the ITAT allowed the appeal of the assessee based on the absence of exempt income during the impugned year, in accordance with the legal interpretations provided by the jurisdictional High Court and the principles established under Section 14A of the Act. The ITAT's decision was in line with the legal framework and the specific circumstances of the case, leading to the dismissal of the appeal by the revenue.