Section 14A Disallowance Not Warranted If No Exempt Income Is Earned: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the disallowance under Section 14A of the Income Tax Act is not warranted if no exempt income is earned.

The two-member bench of Anubhav Sharma (Judicial Member) and Anil Chaturvedi (Accountant Member) has observed that Section 14A envisages that there should be actual receipt of income, and hence Section 14A of the Act will not apply where no exempt income is received or receivable during the relevant previous year.

The assessee/appellant is a multi-state cooperative society registered under the Multi-State Cooperative Societies Act 2002. The assessee is engaged in the manufacturing and trading of chemical fertilizers through its various operating units.

The case of the assessee was selected for scrutiny and assessment. During the course of assessment proceedings, AO has noted that the assessee has earned tax-free income by way of dividends. He also stated that the assessee had investments totaling Rs. 1701.83 crores, as opposed to Rs. 798.49 crores in the previous assessment year.

The AO noted that the assessee had incurred interest and other expenses. AO was of the view that interest-bearing funds had been used for making investments. He, therefore, invoked the provisions of Rule 8D read with Section 14A and worked out the disallowance under Rule 8D(2)(iii) of the Income-tax Rules at Rs. 6.25 crores. On account of the disallowance of interest expenditure under Rule 8D(2)(ii), worked out the disallowance of Rs. 49.71 crores, and thus the aggregate disallowance worked out by AO was Rs. 55,960,00,000.

The assessee carried the matter before the CIT (A), who granted partial relief to the assessee by deleting the disallowance to the extent of Rs. 49.71 crores but upheld the disallowance under Rule 8D(2)(iii) of Rs. 6.25 crore.

The assessee contended that disallowance under Rule 8D(2)(iii) of the Income-tax Rules be restricted to investments, which actually yielded exempt income. Since the assessee has earned an exempt income of Rs. 2.48 crores, the disallowance should be restricted to that amount.

The tribunal determined that there has been no finding by lower authorities that all investments have not produced exempt income.

The ITAT returned the case to the AO's desk and directed him to calculate the disallowance under Rule 8D(2)(iii) of the Income-tax Rules based on exempt income and in accordance with the law.

Case Title: Indian Farmers Fertiliser Versus DCIT

Citation: ITA No. 885/Del/2021

Date: 10.02.2023

Counsel For Appellant: Tarandeep Singh, Adv.

Counsel For Respondent: Abha Rani Singh, CIT-(DR)

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