The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) upheld the deletion of disallowance under Section 14A of the Income Tax Act, by the Commissioner of Income Tax (Appeals [CIT(A)], on expenditure incurred in relation to income not includible in the total income (exempt income).
The Assessing Officer had made a disallowance of ₹35 Lakhs under Section 14A, applying Rule 8D, on the grounds that the assessee had earned exempt income in the form of dividends amounting to ₹25,32,679.
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However, the assessee, Mundra International Container Terminal Private Limited contested this disallowance, arguing that no expenditure was incurred to earn this exempt income. The CIT(A) restricted the disallowance to the amount of exempt income earned, i.e., ₹25,32,679, in accordance with various judicial precedents.
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For the Assessment Year 2016-17, the CIT(A) deleted the disallowance under Section 14A on the grounds that the assessee did not earn any exempt income during this year. This decision was based on the jurisdictional High Court ruling in the case of *Corrtech Energy Pvt. Ltd.*, which held that no disallowance under Section 14A can be made if no exempt income is earned by the assessee during the relevant financial year.
The Income Tax Appellate Tribunal bench of Judicial Member T R Senthil Kumar and Accountant Member Annapurna Gupta upheld the deletion of disallowance by CIT(A) for both Assessment Years 2015-16 and 2016-17. The disallowance was limited to the amount of exempt income earned in 2015-16, and no disallowance was permitted in 2016-17 since no exempt income was earned.
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In short, the ITAT Ahmedabad Bench confirmed that no disallowance under Section 14A of the Income Tax Act is warranted when the assessee has not earned any exempt income during the assessment year. This reaffirms that Section 14A of the Income Tax Act cannot be invoked in the absence of exempt income.
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