Before Amendment Section 14A cannot be invoked if no exempt income was earned – ITAT
In a recent judgment, ITAT Rajkot has held that for the pre-amendment period, section 14A cannot be invoked where no exempt income was earned. Admission of SLP, is a significant step in the legal process, indicating that the Supreme Court acknowledges the case and will proceed to examine it further and deliver the judgement in future, thus, till that time, the judgement of the respective high courts will prevail.
ABCAUS Case Law Citation:
ABCAUS 4160 (2024) (07) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) NFAC in confirming disallowance of interest u/s 14A of the Income Tax Act, 1961 (the Act) r.w.s 8D of the Income Tax Rules, 1962 (The Rules).
The assessees was a Private Limited Company, and during the assessment proceedings, the Assessing Officer (AO), on perusal of Profit and Loss account and balance sheet, observed that the assessee had made investments in shares. The only income likely to arise from this investment wass ‘dividend’, which is exempted and do not form part of the gross total income. However, no expenses were attributed by the assessee, towards earning of this income.
The AO was of the view that assessee should have computed the disallowance, as required by section 14A read with rule 8D of the Rules. The assessing officer, also referred Circular No. 5/2014 dated11/02/2014 of CBDT, which has clarified that disallowance of expenses u/s 14A is required even when no exempt income has been earned during the financial year.
Since no such disallowance was computed by the assessee, therefore, the assessing officer computed the disallowance and made addition u/s 14A of the Act.
The Revenue contended that even if there is no exempt income, the disallowance u/s 14A of the Act, should be attracted. It was also stated that the explanation inserted by the Finance Act, 2022 in section 14A, with effect from 1-4-2022, which provides that provisions shall apply whether or not exempt income has accrued, arisen or received. This amendment is clarificatory in nature and thus applicable retrospectively.
It was further stated that the SLP filed by the revenue has been admitted by the Hon’ble Supreme Court against the order of High Court that where assessee did not have exempt income, no disallowance could be made under section 14A read with rule 8D of the Rules.
The Tribunal observed that assessee had own surplus fund by way of share capital and reserves during the previous year and investment were made out of own interest free funds. Since the said investment was made by the assessee in the previous year, therefore interest free funds of previous year has to be examined.
The Tribunal noted that interest free funds of the assessee were more than investment made by the assessee in shares,hence, disallowance under section 14A of the Act, should not be attracted.
The Tribunal noted that the Hon’ble Jurisdictional High Court had held that mere fact that assessee availed of mixed funds i.e. interest free as well as interest bearing funds, and utilised them for making investments in securities and is earning tax free income, then applicability of section 14A, read with rule 8D of the Rules would not be automatic and hence no disallowance should be made.
The Tribunal also observed that during the year under consideration the assessee had not earned any exempt income therefore no disallowance is attracted in the hands of the assessee as held by the Hon`ble High Court of Madras that section 14A of the Act, cannot be invoked where no exempt income was earned by assessee in relevant assessment year.
The Tribunal further observed that the assessee`s case under consideration, pertained to assessment year prior to the amended provisions of the Act and hence does not apply to the assessee. Therefore, the CBDT Circular No.5/2014 was not acceptable as the assessee did not earn exempt income.
The Tribunal finally dealt with the argument of the revenue, to the effect that SLP filed by the Revenue has been admitted by the Hon’ble Supreme Court, therefore, judgement of the Hon`ble Supreme Court, favours the Revenue.
The Tribunal satted that admission of an SLP signifies that the Hon`ble Supreme Court has decided to hear the case on its merits. While it may not involve a detailed reasoned judgement immediately, the act of admission of SLP, is a significant step in the legal process, indicating that the Supreme Court acknowledges the case and will proceed to examine it further and deliver the judgement in future, thus, till that time, the judgement of the respective high courts will prevail. Therefore, admission of a special leave petition (SLP) by the Hon`ble Supreme Court, does not mean and does not constitute a final judgement on the merits of the case by the Hon`ble Supreme Court. The actual final judgement will be rendered, after the Supreme Court has heard arguments from both sides and thoroughly considered the legal issues involved. Therefore, mere admission of an SLP does not mean that it is a final judgement of the Hon`ble Supreme Court.
Accordingly, the Tribunal deleted the addition made by the assessing officer and allowed the appeal of the assessee.
Download Judgment ABCAUS 4160 (2024) (07) ITAT Click Here >>
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