Nirved Traders Pvt. Ltd. Vs DCIT (Bombay High Court)
The assessee, a private limited company and a non-banking financial company, appealed against the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2008-09. The appeal raised the substantial question of whether the Tribunal was correct in confirming a disallowance under Section 14A of the Income Tax Act, 1961 in excess of the exempt income earned by the assessee.
During the relevant assessment year, the assessee claimed interest expenditure of ₹6,87,57,951 and earned exempt dividend income of ₹1,13,72,545. The Assessing Officer (AO) disallowed interest expenditure of ₹3,79,83,539 and further disallowed administrative expenditure, resulting in a total disallowance of ₹4,22,72,425 under Section 14A read with Rule 8D. The Tribunal upheld the disallowance.
Before the High Court, the assessee submitted that several High Courts had consistently held that a disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned during the relevant year. The assessee stated that it would accept the disallowance if it was restricted to the exempt dividend income of ₹1,13,72,545.
The High Court examined the decisions of various High Courts. It referred to the Delhi High Court’s decision in Cheminvest Ltd., which held that where no exempt income is earned, no disallowance under Section 14A is permissible. It also considered the Karnataka High Court’s decision in Pragati Krishna Gramin Bank, which held that expenditure disallowed under Section 14A must bear a reasonable nexus to the exempt income and cannot exceed such income. The Court further referred to the Gujarat High Court’s decision in Corrtech Energy (P.) Ltd., which held that Section 14A has no application where no exempt income is claimed.
