2017 (7) TMI 356 - AT - Income Tax

Disallowance u/s 14A r.w. rule 8D - appellant company neither received nor claimed any dividend income in its return which is exempt u/s 10(34) - Held that - The undisputed fact in this case is that the assessee had shown investment of ₹ 5,65,00,000/- in non-current investment. It is also not disputed that no dividend income was earned on the same during the year. The Jurisdictional High Court in the case of CIT Vs. Lakhani Marketing (2014 (7) TMI 44 - PUNJAB AND HARYANA HIGH COURT ) has held that no disallowance u/s 14A is warranted in the absence of exempt income. Thus in the facts and circumstances of the present case and the legal precedence on the issue, no disallowance u/s 14A is warranted since the assessee has not earned any exempt income during the year. The order of the Ld. CIT(A) is, therefore, set aside and appeal of the assessee stands allowed.

Summary

Issues Involved:
1. Disallowance of ?1,55,333/- under Section 14A read with Rule 8D of the Income Tax Act.
2. The applicability of Section 14A when no exempt income is earned during the assessment year.

Detailed Analysis:

Disallowance under Section 14A read with Rule 8D:
The primary issue in the appeal was the disallowance of ?1,55,333/- made by invoking the provisions of Section 14A read with Rule 8D. The assessee argued that no exempt income was earned during the year, and thus, no disallowance under Section 14A was warranted. The CIT(A) upheld the Assessing Officer's (AO) decision, who relied on CBDT Circular No. 5 of 2014, stating that disallowance under Section 14A is applicable irrespective of whether exempt income was earned or not.

Applicability of Section 14A in the Absence of Exempt Income:
The Tribunal considered the decisions of various High Courts, including the Jurisdictional High Court in CIT Vs. Lakhani Marketing and CIT Vs. Mascot Foot Care, which held that no disallowance under Section 14A is warranted in the absence of exempt income. The Tribunal also referred to the Delhi High Court's decision in CIT-4 Vs. Holcim India Pvt Ltd, which supported the view that Section 14A cannot be invoked when no exempt income is earned.

The Tribunal noted that the AO's reliance on the Special Bench decision in Cheminvest Ltd Vs. ITO was misplaced, as the Delhi High Court had reversed this decision, clarifying that Section 14A does not apply when no exempt income is earned. The Tribunal also highlighted that the CBDT Circular No. 5 of 2014 is binding on the Department but does not override judicial decisions.

Conclusion:
The Tribunal concluded that in the absence of any exempt income during the year, no disallowance under Section 14A is warranted. The Tribunal set aside the order of the CIT(A) and allowed the appeal of the assessee, stating that the reliance on the CBDT Circular and the Supreme Court decision in Rajendra Prasad Moody was misplaced in the context of Section 14A.

Judgment:
The appeal of the assessee is allowed, and the disallowance of ?1,55,333/- under Section 14A read with Rule 8D is deleted.

Order Pronounced:
The order was pronounced in the Open Court on 11th April, 2017.