Special Bench of the Income Tax Appellate Tribunal, New Delhi in the case of holds that expenditure relating to exempt income to be disallowed even if assessee has not earned any tax-free income.
Background
Section 14A of the Income-tax Act, 1961 (‘Act’), inserted by the Finance Act, 2001 with retrospective effect from 1 April 1962, provides that no deduction shall be allowed in respect of expenditure incurred in relation to exempt income.
Facts
Cheminvest Ltd. (‘assessee’) deals in portfolio investment of shares on capital account as well as trading account. The assessee utilized borrowed funds for the purposes of investment. The assessee did not receive any dividend income during the year.
The Assessing Officer (‘AO’) disallowed the proportionate amount of interest under section 14A of the Act on the ground that borrowed funds were utilized for making long term investment.
The Commissioner of Income Tax (Appeals) upheld the disallowance made by the AO, but directed the AO to disallow only the proportionate amount of interest paid after adjusting the interest receipt.
The assessee and the Revenue filed cross appeals against the order of the CIT(A) to the Income Tax Appellate Tribunal (‘ITAT’).
In view of the contrary decisions rendered by different Benches of the ITAT, a Special Bench was constituted to decide whether disallowance under section 14A of the Act can be made in a year in which no exempt income has been earned or received by the assessee.
Contentions of the assessee
