Cheminvest Limited Vs CIT (Delhi High Court)
The Delhi High Court considered an appeal filed by the assessee under Section 260A of the Income-tax Act, 1961, against the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2004-05. The substantial question of law was whether a disallowance under Section 14A could be made in a year in which the assessee had not earned or received any exempt income.
The assessee, engaged in the business of making investments in shares and granting and accepting loans, had borrowed funds on which interest expenditure of ₹1,21,03,367 was incurred. It was undisputed that during the relevant assessment year the assessee did not earn any dividend income from its investments. Despite this, the Assessing Officer disallowed ₹97,87,570 under Section 14A on the ground that the borrowed funds had been used to purchase shares intended to earn exempt dividend income. The Commissioner (Appeals) upheld the applicability of Section 14A while modifying the computation of disallowance. Thereafter, a Special Bench of the ITAT held that disallowance under Section 14A could be made even if no exempt income had been earned, relying on the Supreme Court decision in CIT v. Rajendra Prasad Moody. The regular Bench subsequently remanded the matter to the Assessing Officer for fresh consideration.
