ITAT Upholds CIT(A)’s Deletion of S.14A Disallowance Due to No Exempt Income [Read Order]

The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) upheld Commissioner of Income Tax (Appeals) [CIT(A)]’s deletion of disallowance under Section 14A of Income Tax Act, 1961, ruling that the provision does not apply in the absence of exempt income.

The Revenue-appellant, appealed against the order passed by CIT(A) dated 23/06/2017 for the Assessment Year (AY) 2012-13. In this case,Lycos Internet Ltd,respondent-assessee, had its disallowance made by the AO under Section 14A deleted by CIT(A).

The Revenue counsel argued that CIT(A) deleted the addition because no exempt income was earned from investments in subsidiary/group entities. He cited Central Board of Direct Taxes (CBDT) Circular No. 5/2024, stating that Section 14A applies if investments can yield exempt income, regardless of whether any was earned. He maintained that the provision prevents deductions for expenses related to exempt income and relied on the Assessing Officer (AO)’s order.

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The assessee's counsel argued that the AO did not dispute the absence of dividend income during the year. Citing Supreme Court rulings, he maintained that Section 14A applies only when expenses are claimed against exempt income. He asserted that Rule 8D is only a method to determine such expenses and cannot override Section 14A of the Act.

Since no exempt income was earned, he contended that CIT(A) correctly deleted the disallowance. He also noted that no fresh investments were made, and existing investments were mainly in foreign subsidiaries, where dividends are taxable. Only one Indian company, Lanco Net Ltd, was involved, but it did not declare dividends, and all investments were made in earlier years.

Read More: No Disallowance u/s 14A when no Exempt Income earned by Assessee: ITAT dismisses Revenue Appeal

The two member bench comprising Vijay Pal Rao (Vice President) and Madhusudan Sawdia (Accountant Member) reviewed the submissions and records, noting that the AO accepted that no dividend income was earned from investments in subsidiaries or Lanco Net Ltd during the year. Despite mentioning the total investment amount, the AO did not provide details but acknowledged the absence of exempt income.

CIT(A) deleted the disallowance, stating that Section 14A does not apply when no exempt income is earned. The tribunal referred to the Supreme Court’s ruling in Maxopp Investment Ltd vs. CIT and observed that Section 14A applies only when expenses relate to exempt income. It also noted that most investments were in foreign subsidiaries, where any dividend income would be taxable, and the only Indian investment in Lanco Net Ltd was made in an earlier year without any dividends declared.

Citing Delhi High Court and Punjab & Haryana High Court rulings, the ITAT held that Section 14A could not be applied without exempt income and upheld CIT(A)’s decision to delete the disallowance.

In short, the revenue appeal was dismissed.

To Read the full text of the Order CLICK HERE

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