Kerala HC Dismisses Section 14A Disallowance Appeal as No Exempt Income Was Earned

ACIT Vs HLL Lifecare Limited (Kerala High Court)

The Revenue filed an appeal before the Kerala High Court challenging the order of the Income Tax Appellate Tribunal (ITAT), Kochi Bench, for Assessment Year 2016-17.

The assessee, a Government of India undertaking, filed its original return on 12.10.2016 and a revised return on 31.03.2018. Following scrutiny assessment under Section 143(2) of the Income Tax Act, the Assessing Officer made various additions and disallowances, including disallowance under Section 14A. The assessee appealed before the Commissioner of Income-tax (Appeals) [CIT(A)], who deleted all the disallowances.

The Revenue then appealed before the ITAT. The Tribunal dismissed the appeal, relying on its earlier decisions in the assessee’s own cases for Assessment Years 2010-11 and 2011-12. It reiterated that no disallowance under Section 14A can be made when no exempt income is earned during the relevant year. The Tribunal relied on decisions of the Delhi High Court in Pr. CIT v. IL & FS Energy Development Corporation Ltd. and the Madras High Court in Redington (India) Pvt. Ltd. v. Additional CIT.

Before the High Court, the Revenue argued that CBDT Circular No. 5 of 2014 clarified that expenditure could be disallowed under Section 14A read with Rule 8D even where no exempt income was earned, and that the Tribunal and CIT(A) failed to consider this circular.

The High Court observed that in the assessee’s own earlier assessment years, the Tribunal had consistently held that no disallowance under Section 14A could be made in the absence of exempt income. It further noted that although the Revenue had challenged the Delhi High Court judgment before the Supreme Court, its operation had not been stayed. Considering the settled legal position and the fact that the assessee’s accounts were subject to CAG audit, the Court held that no substantial question of law arose for consideration and dismissed the Revenue’s appeal.

FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT

The revenue has come in appeal, aggrieved by the order in ITA No.321/COCH/2024 dated 9.12.2024 for the assessment year 2016-17.

2. The assessee, a Government of India undertaking, filed its original return of income for the Assessment Year 2016-17 on 12.10.2016, and subsequently filed a revised return on 31.3.2018. The Income Tax Department selected the case for scrutiny under the Computer Assisted Scrutiny Selection (CASS) system and completed the assessment procedure under Section 143(2) of the Income Tax Act (the Act), and issued an assessment order (Annexure A), which included several additions and disallowances. Aggrieved by this, the assessee appealed to the Commissioner of Income-tax (Appeals) [CIT(A)] on multiple grounds, contesting the Assessing Officer’s disallowance of contributions to the Provident Fund, disallowing club expenses, and estimated expenditure under Section 14A for investments made when no exempt income was earned, as well as the recharacterization and disallowance of sales promotion expenses incurred for a window display as commission. Ultimately, the CIT(A) allowed the appeal and deleted all the disallowances made in the initial assessment order.

3. Challenging the first appellate order, the Revenue preferred an appeal before the Income Tax Appellate Tribunal (ITAT), Kochi Bench. The ITAT dismissed the Revenue’s appeal, relying on its own prior decisions in the assessee’s own cases for the Assessment Years 2010-11 and 2011-12, and reaffirmed that no disallowance can be made under Section 14A of the Act when there is no exempt income earned during the relevant year. In doing so, the Tribunal placed reliance on the landmark judgments of the Delhi High Court in Pr. CIT v. IL & FS Energy Development Corporation Limited [(2017) 84 taxmann.com 186] and the Madras High Court in Redington (India) Pvt. Ltd v. Additional CIT [(2017) 392 ITR 633 / 77 taxmann.com 257]. The present appeal before the High Court has been filed by the Revenue to challenge this specific final order of the ITAT, Kochi.

4. Heard the counsel for the appellant.

5. The learned counsel for the appellant argued that both the Tribunal and the CIT(Appeals) failed to consider Circular No. 5 of 2014 issued by the Central Board of Direct Taxes (CBDT). He submitted that the CBDT, in exercise of its powers under Section 119 of the Act, explicitly clarified that Section 14A read with Rule 8D provides for the disallowance of expenditure even in cases where the taxpayer has not earned any exempt income during the relevant financial year. Relying on this circular, counsel contended that the original assessment order was strictly in accordance with the law, rendering the subsequent orders of the CIT(Appeals) and the Tribunal per se erroneous and liable to be set aside. He further argued that the decision of the Delhi High Court in Pr. CIT (Supra) has not attained finality as the Revenue’s appeal against it is currently pending before the Hon’ble Supreme Court; consequently, the CBDT circular remains binding on the Assessing Officer, and the assessment order stands fully justified under the provisions of the Act, Rules, and official clarifications.

6. A perusal of the impugned order makes it clear that for the Assessment Years 2009-10, 2010-11, and 2011-12, in the very same assessee’s own cases, the Tribunal consistently held that no disallowance can be made under Section 14A of the Act when no exempt income is claimed or earned by the assessee. The Tribunal arrived at this conclusion by rightly placing reliance on the judgments of the Delhi High Court and the Madras High Court. Although the Revenue has preferred a Special Leave Petition (SLP) before the Hon’ble Supreme Court against the decision of the Delhi High Court in Pr. CIT (supra), the operation of the said judgment has not been stayed till date. Furthermore, since the assessee is a Government of India undertaking whose accounts are strictly subjected to CAG audit, there is no scope for misrepresentation of expenditure. Consequently, having carefully scrutinized the orders of both the CIT(Appeals) and the Tribunal in light of the settled legal position, we find that the substantial question of law framed does not arise for consideration, and this Income Tax Appeal is accordingly dismissed.