2019 (2) TMI 731 - HC - Income Tax

Disallowance u/s 14A - assessee's income exempt from tax is not NIL but has earned exempt income - Held that - In the present case, Counsel for the Revenue however, points out that this is not a case where the assessee had earned no income which was exempt from tax. However, in our opinion, the ratio of the above noted decisions in the cases of Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT and Holcim India (P) Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT would include a facet where the assessee's income exempt from tax is not NIL but has earned exempt income which is larger than the expenditure incurred by the assessee in order to earn such income. In such a situation that disallowance cannot exceed the exempt income so earned by the assessee during the year under consideration. No error in the view of the Tribunal. We record that the assessee had offered voluntary disallowance of expenditure of ₹ 1.30 crores, which is not been disturbed by the Tribunal. - Decided against revenue.

Summary

Issues:
1. Disallowance of expenditure under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Rules.

Analysis:

1. The appellant, the Revenue, appealed against the judgment of the Income Tax Appellate Tribunal regarding the disallowance of expenditure by the assessee in accordance with Section 14A of the Income Tax Act read with Rule 8D of the Act. The respondent assessee, a limited company, had offered a restricted disallowance of ?1.30 crores during the assessment for the year 2009-10. However, the Tribunal considered the statutory auditors' disallowance of ?2.53 crores and the fact that the assessee's income was exempt, leading to the application of Rule 8D of the Rules for disallowance.

2. The Tribunal, in its judgment, rejected the contentions raised and relied on the decision of the Delhi High Court in the case of Cheminvest Ltd. v. Commissioner of Income Tax, where it was held that if the assessee had not earned any exempt income, the disallowance under Section 14A of the Act with Rule 8D of the Rules would not be applicable. The High Court further referred to its earlier decision in the case of CIT v. Holcim India (P) Ltd., which adopted similar principles.

3. Upon reviewing the arguments and precedents, the High Court found that the principles established in the cases of Cheminvest Ltd. and Holcim India (P) Ltd. would apply even if the assessee had earned exempt income larger than the expenditure incurred to earn such income. The disallowance could not exceed the exempt income earned by the assessee during the relevant year. The voluntary disallowance of ?1.30 crores made by the assessee was not disturbed by the Tribunal, and the High Court found no error in the Tribunal's decision.

4. In conclusion, the High Court dismissed the tax appeal, upholding the Tribunal's decision regarding the disallowance of expenditure under Section 14A of the Income Tax Act read with Rule 8D of the Rules. The Court clarified the application of the rules and principles established in previous judgments to determine the permissible disallowance in cases where the assessee earns exempt income.