The Income Tax Appellate Tribunal (ITAT), Mumbai held that Section 14A of the Income Tax Act, 1961 will not apply if no exempt income is received or receivable during the relevant previous year.
The assessee raised the grievance that the Assessing Officer has erred in restricting the disallowance under section 14A of the Income Tax Act, 1961, without appreciating the fact that the appellant company has not earned any tax-exempt income during the relevant assessment year.
However, the assessing officer contended that the CIT(A) erred in deleting the disallowance of Rs 3,35,40,340 under section 8D(2)(ii) without appreciating the fact that the assessee could not link its investments with its own funds.
The tribunal consisting of President, Justice P P Bhatt and vice President, Pramod Kumar while elaborating on Section 14A of the Act said that for the purposes of computing the total income under 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.
“There was no tax-exempt income in the relevant previous year, we hold that no disallowance under section 14A could have been made, on the facts of this case and in the year before us. We, therefore, uphold the plea of the assessee and delete the disallowance of Rs 80,51,200 sustained by the CIT(A). Once we uphold the plea of the assessee that no disallowance under section 14A could have been made on the facts of this case, grievances of the Assessing Officer, against learned CIT(A)’s partially deleting the disallowance under section 14A, become infructuous. The grievance of the assessee is thus upheld and grievances of the Assessing Officer are dismissed as infructuous,” the tribunal said.
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