Excel for
Chartered Accountants

Delhi High Court has ruled that no disallowance can be made u/s 14A of the Income Tax Act, 1961 read with Rule 8D if in the relevant year, the assessee has not earned any exempt income.

Case Details:
ITA No. 486/2014& ITA No. 299/2014; AY: 2007-08 & 2008-09
Date of Decision: 05-09-2014
Commissioner of Income Tax (Appellant) vs Holcim India P. Ltd. (Respondent)

Question before the Court:
Whether the Income Tax Appellate Tribunal was right in deleting the disallowance under Section 14A of the Income Tax Act, 1961 amounting to Rs. 8,61,50,315/- in Assessment Year 2007-08 and Rs. 6,60,93,678/- in assessment year 2008-09 holding that no dividend income was earned by the assessee ignoring the provisions under Section 14A.

Facts of the Case:
The respondent-assessee, a subsidiary of Holderind Investments Ltd., Mauritius, was formed as a holding company for making downstream investments in cement manufacturing ventures in India.

For the Assessment Year 2007-08, the respondent-assessee declared loss of Rs. 8.56 Crores approximately. The assessee had declared revenue receipts of Rs. 18,02,274/- including interest of Rs. 726/- from Fixed Deposit Receipts and profit on sale of fixed assets of Rs. 16,52,225/-. As against this, the assessee had claimed administrative and miscellaneous expenses expenditure written off amounting to Rs. 8.75 Crores. For the Assessment Year 2008-09, the assessee declared loss of Rs. 6.60 Crores approximately. The assessee had declared revenue receipts in the form of foreign currency fluctuation difference gain of Rs. 12,46,595/-. It had claimed expenses amounting to Rs. 7.02 Crores as personal expenses, operating and other expenses, depreciation and financial expenses.

The Assessing Officer holding that the assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investments, disallowed the entire expenditure claimed for both the years.

On appeal CIT(A) did not agree with the assessee’s contention that as no exempt income was claimed earned, no disallowance can be made under Section 14A. He held that disallowance under Section 14A had no relation with the “dominant and immediate connection” between the expenditure and exempt income. It was held by CIT(A) that once the business of the appellant is of holding investment then it has to be held that in view of specific provisions contained in Section 14A and despite the fact that there is no exempt income that expenditure incurred was for holding and maintaining Investment.

Excerpts from the Judgment:

14. 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 05.05.2014. 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” .

15. 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.

16. 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).

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

Download Full Judgment Click Here >>

Delhi High Court-No Disallowance u/s 14A if exempt Income was not earned | 05-09-2014 |