IT: Section 14A
will not apply if no exempt income is received or receivable during the
relevant previous year.
Facts:
1) The disputed issue
in the instant case was:
Whether disallowance under Section 14A can be made in a
year in which no exempt income has been earned or received by assessee?
2) The Special bench
in [2009] 121 ITD 318 (DELHI)(SB)
held that Section 14A disallowance can be made in year in which no exempt
income has been earned or received by assessee. It referred to the decision of
Apex Court in case of CIT v. Rajendra
Prasad Moody [1978] 115 ITR 519 to settle this controversy.
The High Court held
in favour of assessee as under:
1) The Special Bench has relied upon the decision of the Supreme Court
in Rajendra (Supra). In such case the Supreme Court held that Section 57(iii)
does not say that expenditure shall be deductible only if any income is made or
earned. The decision of Supreme Court was rendered in context of allowability
of deduction under Section 57(iii). Thus, such decision could not be used in
reverse to content that even if no income has been received, the expenditure
incurred can be disallowed under Section 14A.
2) The expression ‘does not form part of total income in Section 14A
envisages that there should be an actual receipt of income, which is not
includible in the total income, for the purpose of disallowing any expenditure
in relation to said income.
In
other words, Section 14A will not apply if no exempt income is received or
receivable during the relevant previous year- Cheminvest Ltd. v. CIT [2015] 61
taxmann.com 118 (Delhi)
Editor’s Note:
Section 14A provides for disallowance of
expenditure in relation to income not "includible" in total income. The legislative intent is to allow deduction
of only that expenditure which is relatable to earning of income and it
therefore follows that the expenses which are relatable to earning of exempt
income have to be considered for disallowance, irrespective of the fact whether
any such income has been earned during the financial year or not.
The above position is further clarified by the
usage of term 'includible' in the Heading to section 14A which indicates that
it is not necessary that exempt income should necessarily be included in a
particular year's income, for disallowance to be triggered.
Thus, in light of above, CBDT, vide Circular No. 5/2014 dated 11-2-2014
had clarified that Rule 8D read with section 14A provides for disallowance of
the expenditure even where taxpayer in a particular year has not earned any
exempt income.
The Delhi High Court had not referred to this
Circular in its verdict.
