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2021 (4) TMI 110 - AT - Income TaxDisallowance u/s 14A rwr 8D - AO referring to the CBDT Circler No. 05/2014 dated 11/02/2014 computed the disallowance u/s 14A rwr 8D(ii) by holding that since the assessee had investments during the year the disallowance u/s 14A as per the amended rule 8D has to be made - HELD THAT - It is settled position of law that the provisions of section 14A can be applied to quantify the expenses in relation to exempt income. The Rule 8D can be applied only when there is difficulty in finding the expenditure relating to exempt income. In the case under consideration we find during the course of hearing that the assessee has not derived any exempt income in the relevant previous year so as to attract section 14A rwr 8D as per case law Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT Chettinad Logistics Private Limited 2017 (4) TMI 298 - MADRAS HIGH COURT and CIT vs. Corrteck Engineering Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT . It is however made clear that the learned Assessing Officer shall be at liberty to examine the assessee s financials along with source of investments in the year in which they yield exempt income. Appeal of the revenue is allowed for statistical purposes.
Issues:
1. Disallowance u/s 14A r.w. Rule 8D of the Income Tax Act, 1961. 2. Interpretation of provisions relating to disallowances under section 14A. 3. Application of Rule 8D for disallowance on investments yielding dividend income. Analysis: Issue 1: Disallowance u/s 14A r.w. Rule 8D The case involved a dispute regarding the disallowance under section 14A of the Income Tax Act, 1961, read with Rule 8D. The Assessing Officer (AO) computed the disallowance based on the investments made by the assessee during the relevant year. However, the assessee contended that since no exempt income was earned, the provisions of section 14A were not applicable. The AR of the assessee relied on various case laws to support this argument. The AO, referring to CBDT Circular No. 05/2014, made a substantial disallowance under Rule 8D(ii) despite the absence of exempt income. Issue 2: Interpretation of provisions under section 14A The dispute also revolved around the interpretation of section 14A, particularly concerning the requirement of actual receipt of income not forming part of the total income for disallowance to apply. The assessee argued that as no exempt income was earned, section 14A should not be invoked. The CIT(A) supported this argument by citing a previous decision of the ITAT, Hyderabad, emphasizing the absence of dividend income as a basis for deleting the disallowance. Issue 3: Application of Rule 8D on investments yielding dividend income The ITAT, in its judgment, reiterated the principle that section 14A can be applied to quantify expenses related to exempt income. However, Rule 8D should only be invoked when difficulty arises in determining such expenses. The tribunal noted that the assessee did not earn any exempt income during the relevant year, aligning with legal precedents such as Cheminvest Ltd. and Chettinad Logistics Pvt. Ltd. The ITAT allowed the appeal for statistical purposes, emphasizing that the AO could scrutinize the financials and investment sources in future years where exempt income might be generated. In conclusion, the ITAT upheld the appeal by the revenue, emphasizing the importance of actual receipt of exempt income for invoking disallowance under section 14A, and clarifying the application of Rule 8D in cases involving investments yielding dividend income.
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