2016 (5) TMI 576 - AT - Income Tax

Disallowance made u/s. 14A r. w. Rule 8D - Held that - There is no doubt that the assessee had not earned exempt income during the year under consideration, so, in our considered opinion, no disallowance can be made u/s. 14A of the Act. - Decided in favour of assessee.

Summary

Issues involved:
Cross appeals filed by Assessing Officer and assessee challenging the order regarding disallowance made under section 14A r.w. Rule 8D of the Income tax Rules, 1962.

Analysis:
1. The Assessing Officer (AO) made a disallowance of &8377; 1.66 crore under section 14A as the assessee had made an investment of &8377; 52 crores in equity shares without any disallowance. The AO found no direct nexus between the surplus funds and the investment, relying on the case of Cheminvest Ltd. The First Appellate Authority (FAA) directed the AO to work out the disallowance as per Rule 8D(2) and adopt the average value of assets to &8377; 153.54 crores, restricting the disallowance to &8377; 5.00 lakhs.

2. The Departmental Representative argued that the matter should be decided on merits, while the Authorized Representative contended that no disallowance should be made as the assessee did not earn any exempt income. The Tribunal found that since the assessee did not earn exempt income during the relevant year, no disallowance could be made under section 14A. Citing the case of M/s Gateway Distriparks Ltd., the Tribunal held in favor of the assessee, dismissing the appeal filed by the AO and allowing the appeal of the assessee.

3. The Tribunal emphasized that if the assessee has not earned exempt income in a particular year, no disallowance under section 14A can be made. Therefore, the Tribunal reversed the order of the FAA and decided the issue in favor of the assessee. Consequently, the appeal filed by the AO was dismissed, and the appeal of the assessee was allowed.

In conclusion, the Tribunal's judgment focused on the lack of exempt income earned by the assessee during the relevant year as the basis for dismissing the disallowance made under section 14A. The decision highlighted the importance of establishing a direct nexus between investments and income to determine the applicability of disallowances under tax rules.