Case Law Details
Emmvee Photovoltaic Power Limited Vs ITO (ITAT Bangalore)
No Exempt Income = No U/s 14A Disallowance – ITAT Bangalore Reaffirms Settled Law
The Bangalore ITAT deleted the disallowance of ₹34.64 lakh made under Section 14A r.w. Rule 8D, holding that in the absence of exempt income, no disallowance can be made.
The AO had invoked Section 14A merely because the assessee had made investments in subsidiaries capable of yielding exempt income, even though no exempt income was actually earned during the year. The CIT(A) upheld the disallowance relying on CBDT Circular No. 5/2014.
However, the Tribunal held:
- The existence of exempt income is a pre-condition for invoking Section 14A.
- Section 14A is a machinery provision, which fails when there is no exempt income.
- Binding Karnataka High Court judgment (PCIT vs. Nam Estates Pvt Ltd) clearly supports the assessee.
The ITAT further clarified that:
- CBDT Circular cannot override judicial precedents.
- The Supreme Court ruling in Maxopp Investment Ltd. is distinguishable, as it dealt with cases where exempt income actually existed.
Accordingly, the Tribunal held that no nexus or apportionment arises when there is no exempt income at all, and hence the entire disallowance was unsustainable.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal by the assessee is directed against the order of the learned Commissioner of Income Tax, Appeal ADDL/JCIT (A)-6 Mumbai (hereafter- Learned CIT(A)) under section 250 of the Income Tax Act 1961 (hereafter- The Act).
2. The assessee in the appeal memo has raised several grounds of appeal which are numbered as Ground Nos. 1 to 11. However, the effective issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowances made under section 14A r.w. rule 8D of the Income Tax Rule.
3. The facts in brief are that the assessee is a private company and engaged in manufacture of solar energy products and in developing photovoltaic modules & system for on-grid or off-grid applications. The assessee for the year under consideration was selected for scrutiny under CASS. The AO during the proceedings noted that the assessee had made investment in equity shares of various subsidiaries companies. Hence, the AO invoked the provision of section 14A of the Act r.w.r. 8D of Income Tax Rule and made disallowances of Rs. 34,64,000/- only.
4. The aggrieved assessee preferred appeal before the learned CIT(A) and contended that the provision of section 14A of the Act is not applicable as no exempt income earned during the year. However, the learned CIT(A) rejected the assessee’s contention and confirmed the disallowances made by the AO. The learned CIT(A) referring to the CBDT Circular No. 05.2014 held that provision of section 14A of the Act is applicable even when no exempted income earned during the year. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
5. The learned AR before us contended that the appellant assessee has not earned or claimed exempted income in the year under dispute. Therefore, in the absence of exempt income, the provision of section 14A of the Act cannot be applied for making disallowances of expenses. The learned AR to buttress his argument placed reliance on the judgment of Hon’ble Jurisdictional High Court of Karnataka in the case PCIT vs. Nam Estates Pvt Ltd reported in [2021] 127 taxmann.com 824. On the contrary, the learned DR supported the orders of the AO and the learned CIT(A). It was submitted that section 14A r.w. Rule 8D is applicable once the assessee has made investments capable of yielding exempt income, irrespective of whether such income is actually earned during the year. The learned DR relied on CBDT Circular No. 05/2014 and contended that the legislative intent is to disallow expenditure incurred in relation to investments generating exempt income. It was further argued that the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. supports the application of section 14A of the Act. Accordingly, the disallowance was justified.
6. We have heard the rival contentions of both the parties and perused the materials available on record. The sole issue for our consideration is whether disallowance u/s 14A r.w. Rule 8D can be made in a case where the assessee has not earned any exempt income during the year under consideration.
6.1 From the facts placed on record, it is an undisputed position that the assessee, though having made investments in equity shares of subsidiary companies, has not earned any exempt income during the relevant previous year. This factual aspect has not been controverted by the Revenue authorities at any stage of the proceedings.
6.2 The AO, however, proceeded to invoke the provisions of section 14A r.w. Rule 8D and computed disallowance of Rs. 34,64,000/- merely on the basis that the assessee had made investments capable of yielding exempt income. The learned CIT(A) also confirmed the action of the AO by placing reliance on CBDT Circular No. 05/2014 and held that disallowance u/s 14A is attracted even in the absence of exempt income. In our considered view, the approach adopted by the lower authorities is not sustainable in law. The settled legal position, as laid down by the several Hon’ble High Courts and Tribunal including the Hon’ble Jurisdictional High Court in the case of PCIT vs. Nam Estates Pvt. Ltd. (supra), is that when no exempt income is earned during the relevant assessment year, no disallowance u/s 14A of the Act can be made. The rationale behind section 14A of the Act is to disallow expenditure incurred in relation to income which does not form part of total income. Therefore, in the absence of such exempt income, the machinery provision itself fails.
6.3 We also note that the reliance placed by the learned CIT(A) on CBDT Circular cannot override the binding judicial precedent of the Hon’ble Jurisdictional High Court. It is a settled principle that circulars cannot impose a burden higher than what is contemplated under the statute as interpreted by Hon’ble Courts.
6.4 In the present case, since the assessee has not earned any exempt income during the year under consideration, the very basis for invoking section 14A of the Act does not exist. Accordingly, the disallowance made by the AO and sustained by the learned CIT(A) is liable to be deleted.
6.5 Before parting, the reliance placed by the learned DR on the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT reported in 91 taxmann.com 154, in our considered view, is clearly distinguishable on facts as well as in law. Firstly, in the said decision, the Hon’ble Supreme Court was dealing with cases where the assessee had admittedly earned exempt dividend income during the relevant assessment year. The entire controversy before the Hon’ble Court revolved around the extent and manner of disallowance u/s 14A of the Act, particularly whether the dominant purpose of investment is relevant and whether apportionment of expenditure is required. Thus, the existence of exempt income was an undisputed foundational fact in that case.
6.6 In contrast, in the present case, it is an admitted position that the assessee has not earned any exempt income during the year under consideration. Therefore, the primary condition for invoking section 14A of the Act itself fails. The ratio of Maxopp does not deal with a situation where no exempt income is earned at all, and hence the same cannot be mechanically applied. Secondly, the Hon’ble Supreme Court in Maxopp has itself emphasized that only such expenditure which has a relation or nexus with exempt income can be disallowed and the principle of apportionment applies only when such exempt income exists. In the absence of any exempt income, there cannot be any question of establishing such nexus or applying the theory of apportionment.
6.7 Thirdly, the issue before the Hon’ble Supreme Court in Maxopp was whether the “dominant purpose test” is relevant while applying section 14A of the Act. The Hon’ble Court rejected the dominant purpose test and upheld apportionment of expenditure where exempt income is earned. However, the present case does not involve any such dispute regarding purpose of investment. The issue here is more fundamental, namely, whether section 14A of the Act can be invoked at all in the absence of exempt income. Therefore, the ratio of Maxopp does not advance the case of the Revenue.
6.8 In view of the above, we hold that the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. is clearly distinguishable and does not apply to the facts of the present case where no exempt income has been earned by the assessee. In view of the above discussion, we hold that the disallowance of Rs. 34,64,000/- made u/s 14A r.w. Rule 8D is unsustainable. The same is hereby deleted. Thus, the ground raised by the assessee stands allowed.
7. In the result, the appeal of the assessee is hereby allowed.
Order pronounced in court on 15th day of April, 2026
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