2020 (11) TMI 709 - HC - Income Tax

Disallowance u/s 14A - Tribunal deleting the disallowance as there was no earning of exempt income during the assessment year - Whether no exempt income received by assessee? - non recording of satisfaction - amendment to Rule 8D brought in Finance Act, 2016 with regard to the quantum of expenditure that could be disallowed - HELD THAT - Identical substantial question of law was considered by this Court in the decision in the case of CIT Vs. Celebrity Fashion Ltd. 2020 (9) TMI 1022 - MADRAS HIGH COURT to which, one of us (TSSJ) was a party, wherein it was held that in terms of Section 14A of the Act, only expenditure, which was proved to be incurred in relation to earning of tax free income, could be disallowed and such provision could not be extended to disallow expenditure, which was assumed to have been incurred for earning tax free income. It was further held that to apply provisions of Section 14A of the Act, Assessing Officer should have recorded a finding as to how Sub-Section (1) of Section 14A of the Act would stand attracted and in absence of any such finding, the disallowance made was not justifiable. In the present case there is no opinion recorded by the Assessing Officer as to how Sub- Section (1) of Section 14A of the Act would stand attracted. - Decided in favour of assessee.

Summary

Issues:
Challenge to order under Section 260A of the Income Tax Act, 1961 regarding disallowance under Section 14A read with Rule 8D for assessment year 2014-15.

Analysis:
The appeal was filed challenging the order made by the Income Tax Appellate Tribunal regarding the disallowance under Section 14A read with Rule 8D for the assessment year 2014-15. The substantial questions of law raised included whether the Tribunal was right in deleting the disallowance when there was no earning of exempt income during the assessment year and whether the Tribunal erred in not considering the amendment to Rule 8D limiting the quantum of expenditure that could be disallowed. The appellant argued that the disallowance should not be made as the company had sufficient funds as reserves under interest on loans borrowed for regular business. The Assessing Officer reworked the disallowance under Section 14A amounting to a specific sum, which was later appealed by the assessee. The Commissioner of Income Tax Appeals allowed the appeal, leading the Revenue to challenge the decision before the Tribunal.

The High Court referred to a previous case where it was held that only expenditure directly related to earning tax-free income could be disallowed under Section 14A, and the Assessing Officer must justify the disallowance. The Court emphasized that the Assessing Officer must establish how Section 14A would be attracted, and without such a finding, the disallowance could not be justified. The Court also cited another case where it was determined that Rule 8D cannot extend beyond the scope of Section 14A. The Court noted that in the present case, there was no opinion recorded by the Assessing Officer on how Section 14A would be applicable, leading to the dismissal of the appeal in line with the previous decisions. The Court upheld the decision based on the established legal principles and answered the substantial questions of law against the Revenue.