Case Law Details

Case Name : CIT Vs Holcim India P. Ltd. (Delhi High Court)
Appeal Number : ITA No. 486/2014 & ITA No. 299/2014
Date of Judgement/Order : 05/09/2014
Related Assessment Year :
Courts : All High Courts (4154) Delhi High Court (1286)

On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.20 14. In the said decision it has been held:

“As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the 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 the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2, 03,752/- made by the Assessing Officer was in order” .

Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.

What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).

In these circumstances, we do not find any merit in the present appeals. The same are dismissed in limine.

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Category : Income Tax (27481)
Type : Judiciary (11679)
Tags : high court judgments (4466) rule 8D (99) Section 14A (270)

0 responses to “Section 14A & Rule 8D disallowance cannot be made if there is no exempt income”

  1. VIKAS SARAF says:

    Mr. SSR, assume that you have invested Rs. 100 on 01.04.2014 in INFOSYS. On 31.03.2015, this investment shall complete 365 Days. Up until end of 31.03.2015, any Capital Gain from this investment shall qualify as STCG only! And STCG (STT – based) is TAXABLE! Therefore, when one closes his BOOKS OF ACCOUNTS on 31.03.2015, in the instant year of assessment, the CG was NOT EXEMPT from TAX; & hence Sec. 14A shall not be invoked.

    However, from 01.04.2015, any CG from this investment will be considered as LTCG; & being STT – based, shall be EXEMPT from TAX. Thus, in the year ending MAR 2016, this investment MAY get included in the variable B as per RULE 8D.

    However, for RULE 8D to be applicable, the foremost criteria is ONE MUST HAVE EARNED INCOME & MUST HAVE CLAIMED EXEMPTION from TAX on it! The section is applicable on INCOME; & NOT ON INVESTMENTS!!!

  2. SSR says:

    I have a different view here. In my opinion, Section 14 A should be applicable even in years when there is actually no tax exempt income. This is because of the fact that, the disallowable character of the expenditure related to the ‘exempt’ income continues even if no income is actually earned in the particular year. For example if certain amount of money is borrowed specifically for making investment in equity share of another company, the interest on such borrowed amount will continue to remain ‘disallowable’, whether or not there is any dividend income out of the investment from such borrowed money.

  3. SSR says:

    I have a different view here. In my opinion, Section 14 A should be applicable even in years when there is actually no tax exempt income. This is because of the fact that, the disallowable character of the expenditure related to the ‘exempt’ income continues even if no income is actually earned in the particular year. For example if certain amount of money is borrowed specifically for making investment in equity share of another company, the interest on such borrowed amount will continue to remain ‘disallowable’ irrespective of whether or not there is any dividend income out of the investment from such borrowed money.

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