The Income Tax Appellate Tribunal, in a recent ruling held that section 14A of the Income Tax Act, 1961 cannot be applied in cases where the assessee has not received any exempted income during the relevant assessment year. The Tribunal was considering an appeal filed by the assessee, a Company engaged in the business of construction activities.
In the present case, the assessing Officer disallowed the assessee’s claim of deduction in respect of Rs.33,93,829/- under section 14A of the Act on ground that such income was earned by investing in shares, which would yield exempt income. Accordingly, the officer applied the formula contained in Rule 8D(2)(iii)of the Income Tax Rules, 1962 on account of indirect expenses amounting to Rs. Rs.33,93,829/-
On appeal before the CIT(A), the assessee maintained that the expenses were incurred only in relation to its construction and real estate business, not incurred in relation to earning of exempt income. Further, the investments were in the shares of a Private Limited Company, where of the gain on sale of such shares would result in taxable income. It was further contended that in any case, investments were in subsidiary concerns, which were strategic investments for business purposes; and, that no exempt income by way of dividends was earned during the year under consideration.
The CIT(A), however, rejected the contentions of the assessee and sustained the impugned order by holding that application of Rule 8D of the Rules was mandatory w.e.f. assessment year 2008-09..
The assessee maintained thatit has not earned any exempt income in the relevant AY and therefore, the provisions of section 14A of the Act cannot be invoked.They further cited the decision of Bombay High Court in the case of CIT vs. Delite Enterprises, ITA NO.110 of 2009 and the decision of CIT vs. Holcim India P. Ltd. in ITA No.486/2014 & ITA 299/2014, in which it was held that section 14A cannot be applied in the absence of any exempt income for the relevant assessment year.
The Tribunal while accepting the submissions of the assessee, held that “On the aforesaid primary point itself, we find no reason to uphold the impugned disallowance made by the income tax authorities by invoking section 14A of the Act. Accordingly, the disallowance of Rs.33,93,829/- sustained by the CIT(A) is hereby directed to be deleted. Thus, on this aspect, assessee succeeds.”
Read the full text of the order below.
