No disallowance u/s 14A & Rule 8D can be made if assessee does not have tax-free income and no claim for exemption is sought
Section 14A has been inserted in Chapter IV of the Income tax Act by the Finance Act, 2001, with retrospective effect from 1-4-1962. This Section provides for disallowance of expenditure incurred in relation to income which is not included in the total income of the assessee (i.e. exempt income). The operative part of this Section reads as under:
“For the purposes of computing the total income under this chapter, 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 this Act.”
Proviso to the Section was added by the Finance Act, 2002 w.e.f. 11-5-2001. It provides that the A.O. cannot reopen the assessment u/s.147 for any assessment year prior to A.Y. 2001-02 for this purpose or pass any rectification order u/s.154 for prior years to disallow any such expenditure.
It has been a matter of discussion that whether expenses should be disallowed in case the assessee has not earned any exempt income during the relevant assessment year.Online GST Certification Course by TaxGuru & MSME- Click here to Join
In a recent decision of Delhi High Court in the case of M/s Holcim India P. Ltd. vs. CIT-IV ( ITA No. 486/2014 & ITA No. 299/2014) dated September 5, 2014 (Date of Publication Oct 17, 2014)
The High Court has held that no disallowance can be made u/s 14A if there is no exempt income in the relevant year.
It has mentioned that
“There are three decisions of the different High Courts directly on the issue and against the Revenue;
Further it held that
Recently in one more decision in the case of Alliance infrastructure Projects Pvt. Ltd. vs. DCIT, ITAT Bangalore ITA Nos.220 & 1043(BNG.)/2013 dated September 12, 2014 (Date of Publication: Oct 17, 2014), it has held that
“There is no dispute that the assessee had no exempt income during both the years involved. No doubt as mentioned by the DR, the Special Bench of this Tribunal in the case of Cheminvest Ltd. vs. ITO 121 ITD 318, had held that disallowance under section 14A could be made even in an year in which no exempt income was earned or received by the assessee. This decision of Special Bench of the Tribunal has been, in our opinion, impliedly overruled by various decisions of different High Courts, namely, CIT vs Shivam Motors P. Ltd. (All HC), CIT vs. Corrtech Energy Pvt. Ltd (Guj HC), CIT vs. Winsome Textile Industries Ltd 319 1TR 204 (P&H), CIT Vs.Delite Enterprises (Bom HC) & CIT vs. Lakhani Marketing (P&H HC). Therefore, unless and until there is receipt of exempted income for the concerned assessment years, s. 14A of the Act cannot be invoked. “
CBDT has also issued a circular, dated: 11th Feb, 2014 where it has clarified that expenditure incurred in relation to exempt income would be disallowed under Section 14A even if no such income has been earned in a particular year. It has been mentioned in the circular”
“That the legislative intent is to allow only that expenditure which is relatable to earning of taxable income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not”
Circular are binding on the Tax department but not on the assessee. In the case of K.P.Varghese-vs- I.T.O. 131 ITR 597 SC, UCO Bank-vs-CIT 237 ITR 889 SC, C.B.Gautam-vs-UOI 199 ITR 530 SC (constitution Bench), the apex court has decided that circulars issued by the CBDT are binding on the tax authorities meant for execution of the Act even though such circulars tone down the rigour of law or deviate from or relax the provisions of the Act. Further such circulars are not binding on the assessee.
It looks from the above that after this circular, the Department is bound to follow the circular and will disallow the allowance u/s 14A but assessee is not bound to follow the circular.
In the above mentioned cases which has been held by Different High courts or ITAT in favour of the assessee, no reference has been made of this circulars. However, in the case of ACIT, CC-1(2) vs. Mr. M. Baskaran (ITAT, Chennai Dated July 31st, 2014) while putting its case revenue had mentioned the above circular but while giving its judgment in the favour of the assessee ITAT had not given any reference to this circular.