2015 (9) TMI 238 - DELHI HIGH COURT

Disallowance under Section 14A - whether disallowance can be made in a year in which no exempt income has been earned or received by the Assessee? - Held that:- In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income.

In light of the clear exposition of the law in Holcim India (P) Ltd. (2014 (9) TMI 434 - DELHI HIGH COURT) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.

The Court answers the question framed by holding that the expression “does not form part of the total income” in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Consequently, the impugned order of the ITAT is set aside and the appeal is allowed in the above terms - Decided in favour of assessee.