No disallowance U/s. 14A in absence of actual receipt of income which is not includible in total income

Advocate Akhilesh Kumar Sah

The expression “does not form part of the total income” in Section 14A envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the income in question

Sub-section (1) of section 14A of the Income Tax Act, 1961 (for short ‘the Act’) subject to its Proviso, incorporates that for the purposes of computing the total income under the Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act.

In The Pr.CIT, Nagpur vs. Ballarpur Industries Limited (ITA NO. 51 OF 2016, decided on 13.10.2016), the appellant–Department challenged the orders of the Commissioner of Income Tax and the Income Tax Appellate Tribunal, Nagpur. The Hon’ble Judges of the Nagpur High Court on hearing the learned Counsel for the Department and on a perusal of the captioned orders, observed that both the Authorities had recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Act envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Act would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It was not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the Authorities did not give rise to any substantial question of law. Since no substantial question of law arose in this income tax appeal, the income tax appeal was dismissed with no order as to costs.

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