2018 (6) TMI 449 - AT - Income Tax

Disallowance u/s 14A - Held that - In the absence of exempt income, the provisions of Section 14A cannot be applied. Grounds of Appeal of assessee are allowed.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act.
2. Applicability of Section 14A in the absence of exempt income.
3. Calculation of disallowance under Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure under Section 14A:
The assessee, an investment holding company, filed its return for AY 2012-13 declaring a loss of ?24,550. The Assessing Officer (AO) made an addition of ?57,52,790 due to disallowance of expenditure under Section 14A of the Income Tax Act, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee contended that it did not earn any exempt income such as dividends from its investments and only incurred administration expenses unrelated to the investments. The CIT(A) confirmed the AO's addition despite the assessee's argument that disallowance under Section 14A should not exceed the total expenditure incurred.

2. Applicability of Section 14A in the Absence of Exempt Income:
The assessee argued that in the absence of any exempt income, the disallowance under Section 14A was not justified. This argument was supported by the decision of the coordinate bench of ITAT, Hyderabad in the case of Srinivasa Rao Kalagara, where it was held that the provisions of Section 14A cannot be applied if there is no exempt income. The bench referred to several High Court rulings, including the Hon'ble Delhi High Court in Principal CIT Vs. IL & FS Energy Development Company Ltd., which clarified that disallowance of expenditure under Section 14A requires the presence of exempt income. The court emphasized that the expenditure must be related to the income earned in the same year and that the concept of 'real income' does not support disallowance in the absence of actual exempt income.

3. Calculation of Disallowance under Rule 8D:
The CIT(A) did not appreciate that the AO had not calculated any disallowance under Rule 8D(2)(iii) based on the average value of investments. The assessee had voluntarily disallowed ?55,150 out of the total expenditure of ?80,700. The court noted that Rule 8D(1) indicates a correlation between the exempt income earned in the year and the expenditure incurred to earn it. Thus, if no exempt income is earned, the question of disallowance under Section 14A read with Rule 8D does not arise. The court also dismissed the Revenue's reliance on the CBDT Circular, which suggested that disallowance could be triggered even without exempt income, as it contradicted the expressed provisions of Section 14A and the concept of 'real income'.

Conclusion:
The appeal was allowed in favor of the assessee. The court held that in the absence of exempt income, the provisions of Section 14A cannot be applied, rendering the other grounds of appeal academic and unnecessary to adjudicate. The judgment emphasized the necessity of actual exempt income for disallowance under Section 14A and dismissed the AO's addition and the CIT(A)'s confirmation of the same.