No Disallowance u/s 14A r/w Rule 8D can be Made When No Exempt Income Earned: ITAT [Read Order]

The assessee filed its return of income for A.Y 2016-17 on declaring a total loss of Rs. 102,03,583/- under the normal provision of the Act and at Rs. 102,03,583/- u/s.115JB of the Act.

The case of the assessee was selected for limited scrutiny based on the Issues, whether tax aspects related to investments/advances/loans have been considered in the return of income, and whether the deduction claimed on account of interest expenses is admissible.

Notice was issued and served upon the assessee. Subsequently, various statutory notices along with a questionnaire were also issued. In response to said statutory notices, the assessee has furnished its reply.

The AO observed that the assesse-company has invested a substantial amount into an investment yielding exempt income. It is seen that the assessee had investment of Rs. 78,92,83,088/- as on 31.03.2016 into investment in listed securities and Rs 65,10,18,561/- as on 31.03.2015.

The assessee - company vide submission stated that the company made a strategic Long Term Investment of Rs 78,92 crores in the Equity shares of Saurashtra Cement Ltd. from its own funds of Rs 4.30 crores plus borrowing of Rs 76 crores.

Your Trusted Guide to the Income-tax Act, Updated for 2025! Click here

Out of the total borrowing of Rs 76 crores, 70 crores was raised by the issue of non-interest-bearing securities, viz., optionally convertible Debentures. The short-term borrowing (interest-bearing) of Rs 6 crores is used primarily to sustain the business operations.

Considering this, the question of disallowance interest/business expenditure, if not at all arising as dividend-bearing investment, is out of non-interest-bearing securities, namely optionally

convertible Debentures. The assessee at the time of the assessment order has also given the cash flow along with the audited balance sheet.

Thus, the assessee submitted before the Assessing Officer that during the year, there was no exempt income forming part of total income and therefore the applicability of section 14A is not called for. After going through the assessee’s reply, the Assessing Officer held that the assessee-company had short-term borrowing of Rs. 6 crores and long-term borrowing of Rs 70 crores as on 31.03.2016, and the assessee incurred interest expenses of Rs 1,02,27,946/- in the AY 2016-17.

Thus, the Assessing Officer made a disallowance under Section 14A r.w Rule 8D and computed the same in the Assessment Order. Thus, the Assessing Officer made a disallowance of Rs 1,15,40,253/- u/s.14A of the Act.

Being aggrieved by the Assessment Order, the assessee filed an appeal before the CIT(A). The CIT(A) dismissed the appeal of the Assessee. Aggrieved by this order, the assessee filed an appeal before the Tribunal

Your Trusted Guide to the Income-tax Act, Updated for 2025! Click here

The assessee submitted that during the year, the assessee company did not earn any exempt income as the investment in shares of Saurashtra Cement Limited is that of non-interest-bearing securities, viz., optionally convertible Debentures, and these are only short-term borrowings of Rs. 6 crores used primarily to sustain the business operations.

The assessee further submitted that the assessee made use of short-term borrowing, is interest-bearing primarily to sustain the business of operations. Therefore, the assessee has not earned any exempt income and the question of disallowance under Section 14A r.w. Rule 8D of the Act does not arise.

The assessee submitted that, in fact, the Assessing Officer himself accepted that there is no exempt income forming part of the total income.

The Tribunal observed that the position by the Revenue that the assessee had not earned any exempt income, forming part of the total income during the relevant Financial Year.

The two-member bench comprising Girish Agrawal (Accountant Member) and Suchitra Kamble (Judicial Member) held that once it is established that there is no exempt income, the Revenue cannot take the plea that the disallowance under Section 14A r.w. Rule 8D of the Act is justified.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates