Recently, the delhi High Court in the case
of Cheminvest Ltd. Vs CIT held that in absence of any income claimed as exempt
by the assessee, there cannot be any disallowance u/s 14A of the Act. Very said
view was taken by The Hon'ble Gujarat High Court in the case of CIT vs Corrtech
Energy (P) Ltd. reported in 372 ITR 97. The facts of the case were that, the
assesse was engaged in the business of making investment in shares and
accepting/granting of loans. The Assessee was one of the co-promoters of Max
India Ltd. The Assessee borrowed funds on which interest expenditure of
Rs.1,21,03,367/- was incurred. The factual assertion of the Assessee was that
in the relevant AY no dividend income was earned by the Appellant from the
amount invested in various shares.For the AY in question, the Appellant filed a
return of income declaring a loss of Rs.13,84,086/-. This case was picked up
for scrutiny and the Assessing Officer (AO) completed the assessment under
Section 143(3) of the Act disallowing Rs.97,87,570/- out of the total
expenditure incurred during the year under Section 14A of the Act. The reason
recorded by the AO for this disallowance was that the borrowed funds were
utilized for the purpose of purchase of shares for the purpose to earn dividend
income which is exempted under section 10(34) of the Act and thus, not forming
a part of the total income, and therefore the paid thereon had to be disallowed
under Section 14A.
The CIT (A) by an order dated 27th
September 2007 upheld the applicability of Section 14A of the. In the appeals
before the ITAT, a Special Bench was constituted to decide the question
regarding applicability of Section 14A of the Act in an year when no exempt
income had been earned. The Special Bench by an order dated 5 th August 2009
answered the question by inter
alia referring to the
decision of the Supreme Court in CIT
v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). The Special Bench of
the ITAT negatived the submission of the assesse.
The Assessee then filed an appeal against
the above stated special bench decision befre Delhi High Court, wherein the following question of
law was admitted :-
“Whether disallowance under Section 14A of
the Act can be made in a year in which no exempt income has been earned or
received by the Assessee?”
The court while determining the issue,
observed that the complete answer to the above stated was provided by the very
said Court in the case of CIT
v. Holcim India (P) Ltd. (decision
dated 5th September 2014 in ITA No. 486/2014). The Court then referred to the
decision of Delhi High Court in the case of Maxopp
Investment Ltd. (supra)
and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. CIT (2009)
317 ITR 86. The Court also referred to three decisions of different
High Courts which where in the above said substantial question law was
admitted. The first was the decision in Commissioner
of Income Tax, Faridabad v. M/s. Lakhani Marketing Incl. (decision dated 2nd April 2014
of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn
referred to two earlier decisions of the same Court in CIT v. Hero Cycles Limited
[2010] 323 ITR 518 and CIT v. Winsome Textile
Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat High
Court in Commissioner of
Income Tax-I v. Corrtech Energy (P) Ltd [2014] 223 Taxmann 130 (Guj.) and the third of the Allahabad
High Court in Commissioner
of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5 th May 2014
in ITA No. 88/2014). All the three decisions were passed after taking a
view against the revenue and reiterated the position that when an Assessee had
not earned any taxable income in the relevant AY in question “corresponding
expenditure could not be worked out for disallowance.
The court then observed that in the case Rajendra Prasad Moody (supra), the Hon’ble
Supreme Court explained that the expression "incurred for making or
earning such income‟, did not mean that any income should in fact have been
earned as a condition precedent for
claiming the expenditure. The court further observed that s. 57(iii)
requires is that the expenditure must be laid out or expended wholly and
exclusively for the purpose of making
or earning income. It is the purpose of the expenditure that is relevant in
determining the applicability of s. 57(iii) and that purpose must be making or
earning of income. s. 57(iii) does not require that this purpose must be
fulfilled in order to qualify the expenditure for deduction. It does not say
that the expenditure shall be deductible only if any income is made or earned.
There is in fact nothing in the language of s. 57(iii) to suggest that the
purpose for which the expenditure is made should fructify into any benefit by
way of return in the shape of income. The plain natural construction of the
language of s. 57(iii) irresistibly leads to the conclusion that to bring a
case within the section, it is not necessary that any income should in fact
have been earned as a result of the expenditure."
The court further observed that Section
14A of the Act on the other hand contains the expression “in relation to income
which does not form part of the total income.‟ and accordingly the decision in the
case of Rajendra Prasad
Moody (supra)
cannot be used in the reverse to contend that even if no income has been
received, the expenditure incurred can be disallowed under Section 14A of the
Act. The Court held that that the expression “does not form part of the total
income‟ in Section 14A of the
Act, envisages that there should be an actual receipt of income, which is not
includible in the total income, during the relevant previous year for the
purpose of disallowing any expenditure incurred in relation to the said income.
In other words, the court after referring
the Hon’ble Gujarat High Court’s decision in the case of CIT vs Corrtech 372
ITR 97 & other decisions as enumerated above, held that Section 14A will
not apply if no exempt income is received or receivable during the relevant
previous year.
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