2014 (9) TMI 1094 - AT - Income Tax

Addition u/s 14A - Disallowance being the administrative expenses and finance charges (interest paid) for the money borrowed on the amount utilized for purchase of shares u/s. 14A - Held that - CIT vs. Winsome Textile Industries Ltd. (2009 (8) TMI 220 - PUNJAB AND HARYANA HIGH COURT) held that where there is no claim for exemption of income in such situation sec. 14A has no application. In the present appeal also since the Assessee company has not claimed any exempt income during the year therefore there is no question of disallowance of expenditure. Respectfully following the aforesaid decisions we delete the disallowance made u/s. 14A. Also see CIT vs. Delite Enterprises 2009 (2) TMI 498 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues:
Disallowance of administrative expenses and finance charges under section 14A of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance of Administrative Expenses and Finance Charges
The Appellate Tribunal, Mumbai, heard the appeal regarding the disallowance of Rs. 10,12,366, consisting of administrative expenses and finance charges, under section 14A of the Income Tax Act, 1961. The Assessee argued that since no exempt income was claimed, there should be no disallowance. The Assessee cited precedents like M/s. Siva Industries and Holding Ltd. vs. ACIT, CIT vs. Shivam Motors Pvt. Ltd., and ACIT vs. Mr. M. Baskaran to support their stance. On the contrary, the Senior DR defended the addition by referring to the Special Bench decision in the case of Cheminvest Ltd. vs. ITO. The Assessee's firm was involved in cotton trading and importing special chemicals, with the borrowed funds used for investments related to tax-exempt income. The AO computed the disallowance under section 14A r.w. Rule 8D of the Income Tax Rules, resulting in the disallowance of Rs. 10,12,366.

Issue 2: Judicial Interpretation
The Assessee's appeal before the CIT(A) was dismissed, upholding the AO's view following the Special Bench decision in Cheminvest Ltd. vs. ITO. The Special Bench concluded that if expenditure on interest is incurred in relation to income not forming part of total income, it must be disallowed, irrespective of whether the Assessee earned income or not. However, conflicting decisions arose. The Allahabad High Court in the case of M/s. Shivam Motors Pvt. Ltd. held that if no tax-free income was earned, the corresponding expenditure could not be disallowed. Subsequent decisions, such as ACIT vs. Mr. M. Baskaran and CIT vs. Winsome Textile Industries Ltd., aligned with this view, emphasizing that where no claim for exemption of income exists, section 14A has no application, leading to the deletion of the disallowance.

Conclusion
The Appellate Tribunal allowed the Assessee's appeal, emphasizing that since no exempt income was claimed during the year, there should be no disallowance under section 14A of the Act. The Tribunal relied on various judicial interpretations and precedents to support its decision, ultimately ruling in favor of the Assessee.

This detailed analysis covers the issues of disallowance of administrative expenses and finance charges under section 14A of the Income Tax Act, 1961, along with the judicial interpretations and precedents considered in the judgment.