Section 14A will not apply if no exempt income

Advocate Akhilesh Kumar Sah

McDonald’s India Pvt. Ltd. Vs Addl. CIT (ITAT Delhi)

McDonald’s India case: Section 14A of the Income-tax Act, 1961 will not apply if no exempt income has been received or receivable during the  previous year in question

Recently, before Delhi ITAT, McDonald’s India Pvt. Ltd. vs. Addl. CIT [ITA No.1426/Del/2014, A.Y.: 2009-10, decided on 30.01.2018], following grounds were raised, amongst others, in the appeal:

• That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO has erred in disallowing a sum of Rs. 1,59,60,691 under Section 14A of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’)  read with Rule 8D of the Income Tax Rules, 1962 (‘the Rules’) as expenditure incurred in connection with earning exempt dividend income.
• That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO has erred in invoking the provisions of section l4A of the Act without considering the fact that no expense, whether directly or indirectly, has been incurred by the Appellant towards earning the alleged exempt income.
• That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO has erred in framing a disallowance in accordance with Rule 8D of the Rules without appreciating that the application of Rule 8D is not automatic and it is imperative to first establish that the assessee has actually incurred expenditure in relation to exempt income and arrive at a satisfaction in relation thereto.
• That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO has erred in including loans and advances given to body corporate in the value of investment while computing the disallowance under Section 14A of the Act read with Rule 8D of the Rules.
• Without prejudice to the above, that on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO has erred in disallowing an amount of Rs. 1,59,60,690 as against amount ofRs.l,58,89,594 under section 14A of the Act read with Rule 8D of the Rules.

After hearing both the sides, the learned Members of the ITAT, Delhi found that AO made disallowance of Rs.1,59,60,691/- by invoking the provisions of section 14A read with(r.w.) Rule 8D on the ground that the assessee has made huge investment of Rs.317.79 crores. Rejecting the explanation of the assessee that no dividend income has been received by the assessee during the year and, therefore, no addition could have been made, the AO, relying on various decisions disallowed an amount of Rs.1,59,60,691/-. It was the submission of the counsel for the assessee that in absence of any dividend income received by the assessee during the captioned A.Y., no disallowance could have been made under section 14A r.w. Rule 8D. the learned Members of the ITAT found merit in the above argument of the counsel for the assessee. The Hon’ble Delhi High Court in the case of Cheminvest Limited vs. CITreported in 61 taxmann.com 118 has held that section 14A will not apply if no exempt income has been received or receivable during the relevant previous year. Since in the instant case, it is an admitted fact that no exempt income has been received by the assessee during the impugned assessment year, therefore, in view of the decision of the Hon’ble Delhi High Court in the case of Cheminvest Limited (supra) and in the absence of any contrary material brought to notice by the DR, the learned Members of the ITAT held that no disallowance under section 14A of the Act is called for.