2018 (9) TMI 526 - AT - Income Tax

Addition u/s.14A r.w. Rule 8D - Held that - No disallowance could be made u/s. 14A of the Act. The Hon ble Delhi High Court in the case of Cheminvest Ltd. v. CIT (2015 (9) TMI 238 - DELHI HIGH COURT) has categorically held that section 14A envisages that there should be actual receipt of income which was not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure in relation to the said income. Wherever there is no exempt income includible in the total income of the assessee, the provisions of section 14A cannot be invoked. - Decided in favour of assessee.

Summary

Issues:
- Disallowance under section 14A r.w. Rule 8D of IT Rules, 1962.

Analysis:
The appeal was filed against the CIT(A)'s order confirming the addition of ?56,95,726 made by the Assessing Officer under section 14A r.w. Rule 8D of IT Rules, 1962 for the assessment year 2011-12. The Assessing Officer observed that the assessee did not show any amount disallowable u/s.14A in the audit report, even though the balance sheet indicated investments of ?10,67,74,909, leading to the disallowance. The CIT(A) upheld this disallowance, citing a CBDT Circular. The assessee argued that section 14A should not apply as no exempt income was claimed under section 10(34) during the relevant year. The AR relied on a Delhi High Court case to support this argument.

The AR contended that no disallowance should be made under section 14A if no exempt income was earned, citing a Delhi High Court case. The DR, however, supported the lower authorities' orders and referred to a CBDT Circular mandating disallowance under section 14A even without exempt income. The Tribunal noted that the Assessing Officer made the disallowance due to the absence of any disallowed expenditure u/s.14A in the income tax return. The Tribunal referred to the Delhi High Court's decision in Cheminvest Ltd. v. CIT, emphasizing that section 14A requires actual receipt of income not included in the total income for disallowing expenditure, and if no exempt income is included, section 14A cannot be invoked.

The Tribunal, following the Delhi High Court precedent, held that since the assessee did not earn any exempt income during the year, the disallowance of expenditure under section 14A was not justified. Consequently, the Tribunal set aside the lower authorities' orders and deleted the disallowance of ?56,95,726, allowing the assessee's appeal. The appeal was allowed, and the order was pronounced on 27/08/2018.