Disallowance u/s 14 A is allowable only on Investments that yielded Exempt Income: ITAT rules in favour of Reliance Power Ltd [Read Order]

In the case of Reliance Power Ltd, the Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that disallowance under section 14 A of the Income Tax Act, 1961 is allowable only on Investments that yielded Exempt Income. The ITAT observed that while working out disallowance under section 14 A of administrative expenses under rule 8D (2) (iii) of the act, the assessing officer could have been made only after taking only those investments that have yielded exempt income.

Reliance Power Ltd, the assessee is a company engaged in the business of development, construction, and operation of power generation projects. It filed its return of income on 26/11/2015 at the business loss of Rs. 600,614,160/– under the normal provisions of the Income Tax Act and book profit was computed at Rs 263,066,118/–. The return of income was picked up for scrutiny and the notices were issued. 

The assessment order under section 143 (3) of the act was passed wherein disallowance under section 14 A read with rule 8D of the act was made of Rs. 705,409,746/– as per the normal computation of total income and further the identical amount was also added under the book profit computed under section 115JB of the act.

On appeal, the  CIT – A restricted disallowance to the extent of exempt income while computing income as per normal computation and further while computing the book profit he restricted the addition to Rs. 112,000/– as the same was offered by the assessee and agreed.

The assessee stated that only those investments which have yielded exempt income during the year should be considered for disallowance and further when the assessee has own funds which are more than the value of the investment the disallowance of interest under rule 8D (2) (ii) cannot be made. 

It was viewed that the assessee has earned exempt income during the year of Rs. 24,800,670/–. The assessee on its own offered disallowance   u/s 14A of the Act of Rs. 4,368,868/–. The assessing officer computed interest disallowance under rule 8D (2) (ii) of the act of Rs. 198,245,193 and further, the administrative expenses are disallowed under rule 8D (2) (iii) of Rs. 511,533,421/– and therefore the total disallowance was computed of Rs. 709,778,614/–.

It was contended that while working out disallowance under section 14 A of administrative expenses under rule 8D (2) (iii) of the act made by the assessing officer of Rs. 511,533,421/– could have been made only after taking only those investments which have yielded exempt income during the year. In Cargo Motors Private Limited versus Deputy Commissioner of Income Tax wherein it has been held that to make disallowance of expenses under section 14 A as per rule 8D, only those investments were to be considered for computing average value of investments which yielded exempt income during the year. Therefore, both the grounds in the appeal of the assessee are allowed.

It was evident that the disallowance under section 14 A of the act cannot be applied to more than exempt income earned during the year for the impugned assessment year.

A two-member bench comprising of  Shri Prashant Maharishi, AM and Shri Rahul Chaudhary, JM observed that when the assessee does not have any exempt income during the year, the assessee did not claim any exemption and therefore there cannot be any disallowance under section 14 A of the act. Further, the amendment made to the Income Tax Act is also applicable with effect from 1 April 2022. The Tribunal dismissed the appeal of the revenue and allowed the appeal of the assessee, however, there is no exempt income during the year, and such an issue becomes academic.

To Read the full text of the Order CLICK HERE

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