2024 (6) TMI 645 - AT - Income Tax

Disallowance u/s 14A - whether assessee has not earned any exempt income or in excess of income claimed to be exempt? - HELD THAT - Delhi High Court in the case of Delhi International Airport (P.) Ltd . 2022 (10) TMI 300 - DELHI HIGH COURT held that section 14A would not be applicable if no exempt income was received or receivable during relevant previous year. Delhi High Court in the case of Amadeus India (P.) Ltd 2022 (11) TMI 384 - DELHI HIGH COURT held that section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year. Ahmedabad ITAT in the case of Edelweiss Financial Advisors Ltd. 2020 (12) TMI 392 - ITAT AHMEDABAD held that disallowance of expenses under section 14A read with rule 8D could not exceed amount of exempted income. The Ahmedabad ITAT in the case of Addlife Investments (P.) Ltd 2020 (6) TMI 240 - ITAT AHMEDABAD held that disallowances made under section 14A read with rule 8D could not exceed amount of exempt income earned by assessee during year. In the case of Asian Grantio India Ltd 2019 (10) TMI 1193 - ITAT AHMEDABAD the Ahmedabad ITAT held that Disallowance of expenses under section 14A read with rule 8D of 1962 Rules cannot be made in absence of exempt income. Further, as observed by the Delhi High Court in the case of Era Infrastructure 2022 (7) TMI 1093 - DELHI HIGH COURT amendment made by the Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 01-04-2022 and cannot be presumed to have retrospective effect and therefore will not apply to the impugned assessment year under consideration. Whether disallowance made u/s 14A could not be added in assessee-company's income for purpose of computation of income u/s 115JB - Supreme Court of India in the case of Atria Power Corporation Ltd. 2022 (8) TMI 1322 - SC ORDER dismissed the SLP of the Department against High Court ruling that disallowance made under section 14A could not be added in assessee-company's income for purpose of computation of income under section 115JB of the Act. The Karnataka High Court in the case of J.J. Glastronics (P.) Ltd. 2022 (4) TMI 1187 - KARNATAKA HIGH COURT held that amounts disallowed under section 14A could not be added to net profit while computing book profit under section 115JB of the Act. The ITAT Ahmedabad in the case of Vishal Export Overseas Ltd 2022 (8) TMI 88 - ITAT AHMEDABAD held that disallowances made under section 14A read with rule 8D could not be applied to provision of section 115JB of the Act. The Delhi ITAT in the case of Vireet Investment (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI held that computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D.

Summary

Issues Involved:
1. Validity of the CIT(A)'s order.
2. Disallowance under Section 14A read with Rule 8D.
3. Applicability of disallowance under Section 14A for computation of book profits under Section 115JB.

Issue-Wise Detailed Analysis:

1. Validity of the CIT(A)'s Order:
The assessee contested the validity of the CIT(A)'s order, arguing that it was void and bad in law. The CIT(A) had upheld the Assessing Officer's (AO) decision to disallow Rs 9,60,100 under Section 14A, even though the assessee claimed that the net interest income was positive and that sufficient interest-free funds were available. The CIT(A) relied on the amendment to Section 14A, effective from April 1, 2022, which was deemed clarificatory and retrospective. The CIT(A) cited various judicial precedents to support the view that disallowance under Section 14A could be made even if no exempt income was earned.

2. Disallowance under Section 14A read with Rule 8D:
The AO observed that the assessee had made an average investment of Rs 9,60,10,037 and claimed interest expenses of Rs 45,69,620. The AO applied Rule 8D and disallowed Rs 9,60,100 under Section 14A. The assessee argued that the disallowance should be restricted to the exempt income of Rs 2,088 earned during the year, citing various judicial precedents. The CIT(A) dismissed this argument, stating that the amendment to Section 14A was clarificatory and retrospective, thus allowing disallowance even if no exempt income was earned. The CIT(A) referenced multiple cases, including Cheminvest Ltd., Holcim India Pvt. Ltd., and others, to support this view.

3. Applicability of Disallowance under Section 14A for Computation of Book Profits under Section 115JB:
The assessee argued that disallowance under Section 14A read with Rule 8D should not be used for adjustments to book profits under Section 115JB. The CIT(A) and the AO did not accept this argument. However, the Tribunal referred to multiple judicial precedents, including the Supreme Court's decision in Atria Power Corporation Ltd. and the Karnataka High Court's decision in J.J. Glastronics (P.) Ltd., which held that disallowances under Section 14A could not be added for computing book profits under Section 115JB. The Tribunal also cited the Delhi ITAT's decision in Vireet Investment (P.) Ltd., which held that computation under Explanation 1 to Section 115JB(2) should be made without resorting to Section 14A read with Rule 8D.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that no disallowance under Section 14A could be made if no exempt income was earned or in excess of the exempt income. Additionally, disallowances under Section 14A could not be added for computing book profits under Section 115JB. The Tribunal's decision was based on various judicial precedents, including those from the Supreme Court and High Courts, which supported the assessee's contentions. The order was pronounced in the open court on June 12, 2024.