2022 (9) TMI 1238 - AT - Income Tax

Disallowance u/s 14A read with 8D - absence of any exempt income - HELD THAT - Going by the language employed in section 14A of the Act, the possession which emerges is that whether the assessee has not earned any exempt income, there cannot be disallowance of the expenditure as it would resulting imposing tax on hypothetical income which is wholly impermissible in law, in view of the decision rendered by various High Courts as well as Tribunal. As noted that while deciding the issue, CIT(A) relied on the judgement in the case of CIT vs Oil Industry Development Board 2019 (3) TMI 1571 - SC ORDER filed by the revenue against the judgement of Hon ble Delhi High Court 2018 (2) TMI 1861 - DELHI HIGH COURT by relying upon the decision in the case of CIT vs Essar Teleholdings Limited 2018 (2) TMI 115 - SUPREME COURT - The Hon ble Delhi High Court had rules that, in absence of any exempt income, disallowance u/s 14A of the Act of any amount was not permissible. In arriving at this conclusion, the Hon ble Delhi High Court had relied upon its earlier decision in the case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT . The above proposition of law has been well accepted by various courts and as such we do not want to interfere in the order passed by the CIT(a) and following the decision of Co-ordinate Bench in the case of ACIT vs K. Raheja Corporate Services Pvt. Ltd. 2022 (7) TMI 1044 - ITAT MUMBAI . Appeal of the revenue is dismissed.

Issues:
1. Disallowance under section 14A read with Rule 8D when no exempt income is received.
2. Interpretation of CBDT Circular No. 03/2018 and Rule 8D for correct computation.
3. Consideration of section 14 and section 14A as per judicial interpretations.
4. Validity of disallowance made by Assessing Officer under section 14A read with Rule 8D.
5. Appeal against the order of Commissioner of Income Tax (Appeals) deleting the disallowance.

Issue 1: Disallowance under section 14A read with Rule 8D when no exempt income is received:
The revenue appealed against the order of the Commissioner of Income Tax (Appeals) deleting the disallowance made under section 14A of the Income Tax Act when no exempt income was received. The Assessing Officer had made the disallowance based on the assumption that expenses were incurred on investments that might yield exempted income in the future. However, the Tribunal held that imposing a disallowance in the absence of exempt income would amount to taxing hypothetical income, which is impermissible in law. The Tribunal referred to various judicial decisions, including the Supreme Court's ruling in CIT vs Oil Industry Development Board, to support the conclusion that disallowance without exempt income is not permissible.

Issue 2: Interpretation of CBDT Circular No. 03/2018 and Rule 8D for correct computation:
The revenue relied on CBDT Circular No. 5/2014 to argue for the disallowance under section 14A irrespective of exempt income. However, the Tribunal emphasized that circulars cannot exceed the main provision's literal language. It clarified that the computation mechanism under Rule 8D cannot go beyond the scope of section 14A. The Tribunal highlighted that the decision in PCIT vs IL&FS Energy Development Pvt. Ltd. supported the view that disallowance without exempt income is unwarranted.

Issue 3: Consideration of section 14 and section 14A as per judicial interpretations:
The revenue contended that the CIT(A) erred in not considering the interpretations of section 14 and section 14A by ITAT (Amritsar) and the Supreme Court. However, the Tribunal upheld the CIT(A)'s decision based on the legal principles established by various courts, including the Delhi High Court's rulings in cases like CIT vs Essar Teleholdings Limited and Cheminvest Ltd. The Tribunal found no grounds to interfere with the CIT(A)'s order on this issue.

Issue 4: Validity of disallowance made by Assessing Officer under section 14A read with Rule 8D:
The Assessing Officer had disallowed expenses under section 14A read with Rule 8D, assuming potential utilization of borrowed funds for investments. The Tribunal, however, dismissed the grounds for disallowance due to the absence of exempt income. It referenced precedents and legal interpretations to support the decision to reject the disallowance.

Issue 5: Appeal against the order of Commissioner of Income Tax (Appeals) deleting the disallowance:
The revenue's appeal against the Commissioner of Income Tax (Appeals) order deleting the disallowance under section 14A of the Act read with Rule 8D was dismissed by the Tribunal. The Tribunal found no reason to interfere with the CIT(A)'s decision, citing legal precedents and a Co-ordinate Bench decision in a similar case. The appeal of the revenue was consequently dismissed.

This detailed analysis of the judgment provides insights into the legal reasoning and precedents considered by the Tribunal in addressing the various issues raised in the appeal.

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