2017 (12) TMI 811 - HC - Income Tax

Addition u/s 14A - Held that - If the assessee has not earned any taxfree income, the corresponding expenditure incurred cannot be taken into consideration for disallowance. See Commissioner of Income Tax v. Shivam Motors (P) Ltd. 2014 (5) TMI 592 - ALLAHABAD HIGH COURT - Decided in favour of assessee.

Summary

Issues:
1. Retrospective application of a policy circular dated 10th December 2015.
2. Challenge to the judgment and order dated 10th December 2014 by the Income Tax Appellate Tribunal regarding disallowance under Section 14A of the Income Tax Act, 1961.
3. Interpretation of Section 14A regarding deduction of expenditure incurred in relation to income not forming part of the total income.

Analysis:
1. The respondent-assessee contended that the appeal cannot be prosecuted due to a policy circular dated 10th December 2015, which the appellant argued could not be applied retrospectively based on an Apex Court order in Civil Appeal No.16815/2017. The High Court agreed that the circular could not be applied retrospectively as the appeal was filed before the circular's issuance.

2. The appeal challenged the judgment of the Income Tax Appellate Tribunal regarding disallowance under Section 14A of the Income Tax Act, 1961 for the assessment year 2009-10. The Assessing Officer disallowed expenses under Section 14A read with Rule 8D, which was partly upheld by the Commissioner (Appeals). The Appellate Tribunal, following the Delhi High Court's decision in Commissioner of Income Tax v. Holcim India (P.) Ltd., deleted the disallowance under Section 14A.

3. The High Court analyzed the interpretation of Section 14A, which disallows deductions for expenditures related to income not forming part of the total income. It noted that if no tax-free income was earned during the relevant year, the corresponding expenditure could not be considered for disallowance. The court agreed with the Delhi High Court's view that Section 14A prohibits deductions for expenses incurred in earning income not forming part of the total income. The High Court also cited the Division Bench of the Allahabad High Court's similar view in Commissioner of Income Tax v. Shivam Motors (P) Ltd. The High Court dismissed the appeal, finding no substantial question of law and upholding the Appellate Tribunal's decision to delete the disallowance under Section 14A.