ITAT Deletes Expense Disallowance u/s 14A Due to Lack of Exempt Income [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) deleted the expense disallowance under Section 14A of Income Tax Act,1961,due to a lack of exempt income during the assessment year ( AY ) 2014-15.

Ardor Overseas Pvt. Ltd.,the appellant-assessee, was involved in a land transaction with Nikshal Properties Pvt. Ltd. during the assessment year 2014-15. Nikshal Properties sold the land to the assessee for Rs. 44 crores, though it had originally purchased the land for Rs. 8 crores just a few days prior.

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M/s. Nikshal Properties claimed that the transaction was an accommodation entry, with the inflated sale price intended to create a bogus capital gain, while the actual value was only Rs. 8 crores. The funds were alleged to have been routed back to the assessee through intermediary entities, with M/s. Nikshal Properties earning a commission. The assessee, however, maintained that the transaction was genuine.

During the assessment, the Assessing Officer ( AO ) reduced the cost of the land from Rs. 44 crores to Rs. 8 crores based on M/s. Nikshal Properties directors' statements that the transaction was inflated. The AO also added Rs. 8 crores to the assessee’s income under Section 68 of the Act, treating a loan from Matrix International—used in the transaction—as unexplained. Additionally, the AO disallowed interest paid on the loan, part of which had been capitalized as the cost of land.

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On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance of expenses under Section 14A of the Act.

The tribunal reviewed the  issue concerning the disallowance of expenses under Section 14A and emphasized that the assessee did not earn any exempt income during the relevant assessment year and noted that this absence of exempt income was pivotal, as Section 14A specifically addresses disallowance of expenses incurred in relation to earning such income.

It highlighted established legal principles indicating that when no exempt income is generated, no disallowance under Section 14A could be justified. Consequently, the bench concurred with the findings of the CIT(A) that the disallowance of expenses was unwarranted and upheld the CIT(A)'s decision to delete the disallowance.

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The two member  bench comprising T.R Senthil Kumar ( Judicial Member ) and Annapurna Gupta ( Accountant Member ) concluded that the CIT(A)’s rationale was sound, reinforcing that without the presence of exempt income, the applicability of Section 14A was negated, leading to the affirmation of the CIT(A)’s order in favor of the assessee.

To Read the full text of the Order CLICK HERE

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