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2019 (5) TMI 318 - AT - Income TaxDisallowance u/s 14A read with Rule 8D - assessee has not earned any exempt income in this assessment year - DR contended that since CBDT Circular No. 5 of 2014 mandates that disallowance u/s. 14A should be made irrespective of earning or not of any exempt income - HELD THAT - As relying on M/S VARDHMAN CHEMTECH PRIVATE LIMITED, CHANDIGARH 2018 (10) TMI 1037 - PUNJAB AND HARYANA HIGH COURT find no merit in the contention of the DR that in the light of the CBDT Circular No. 5 of 2014 disallowance u/s. 14A of the Act is mandatory irrespective of the fact whether the assessee earns exempt income or not. Since the law declared by the Hon ble High Court cannot be overridden by the Circular of the CBDT, the addition made in this behalf is directed to be deleted. Therefore, the appeal of the assessee succeeds and stands allowed.
Issues:
Disallowance under section 14A of the Income-tax Act when no exempt income earned. Analysis: The appeal was against the order of Ld. CIT(A) for AY 2009-10. The assessee raised four grounds of appeal but only pressed ground no. 3 during the hearing. The main contention was the disallowance of expenses under section 14A of the Act when the assessee had neither earned nor claimed any exempt income. The AO and Ld. CIT(A) upheld the disallowance based on the investment in unquoted equity shares and a CBDT circular. The assessee argued that it had not earned any dividend income. The Ld. CIT(A) disagreed, leading to the appeal. The Tribunal considered whether a disallowance under section 14A read with Rule 8D could be made when no exempt income was earned. The assessee demonstrated through financials that no dividend income was received. Citing a decision of the Delhi High Court, the Tribunal held that section 14A cannot be invoked without exempt income. The Revenue argued based on a CBDT circular, but the Tribunal referred to a judgment of the Punjab & Haryana High Court emphasizing that circulars cannot override judicial decisions. The Tribunal concluded that the disallowance was not warranted as no exempt income was earned, thus allowing the appeal. The Tribunal highlighted that the law declared by the High Court prevails over CBDT circulars. Referring to various court decisions, the Tribunal reiterated that section 14A requires actual receipt of income not included in total income for disallowing expenditures. Therefore, the Tribunal directed the deletion of the addition made by the AO. Consequently, the appeal of the assessee was partly allowed, and the disallowance under section 14A was set aside. In conclusion, the Tribunal ruled in favor of the assessee, emphasizing that disallowance under section 14A cannot be made when no exempt income is earned, regardless of CBDT circulars. The judgment highlighted the primacy of judicial decisions over administrative circulars in interpreting tax laws, leading to the deletion of the disallowance in this case.
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