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Srinivas Rao Kalagara, Nizamabad Versus The Asst. Commissioner of Income Tax, Circle-I, Nizamabad

Addition u/s. 14A - application of provisions of Section 14A in the absence of exempt income - Held that:- This issue is no longer res integra as the several High Courts have held that for the purpose of invoking the provisions of Section 14A, it is sine qua non that there should be an exempt income. See Cheminvest Ltd., Vs. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] - We hold that in the absence of exempt income, the provisions of Section 14A cannot be applied. - Decided in favour of assess .....

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r of Income Tax, Appeal is not correct either on facts or in law and in both. 2. The learned Commissioner of Income Tax, Appeal is not justified in confirming the addition of ₹ 4,53,521/- made u/s. 14A of the I.T Act. 3. The learned Commissioner of Income Tax, failed to appreciate the fact that since the investment in share application money is not capable of earning any tax free income, the provisions of disallowance u/s. 14A are not applicable to the facts of the case. 4. The appellant c .....

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3-2015 at a total income of ₹ 41,37,360/-. While doing so, the Assessing Officer (AO) made addition of ₹ 8,56,870/- under the provisions of Section 14A r.w. 8D of Income Tax Rules [Rules] on the investments made on share application money of ₹ 1,28,95,000/- made with Bhagya Laxmi Agro Projects, Karimnagar, the AO by applying the provisions of Rule 8D had disallowed interest of ₹ 8,56,870/-, out of the total interest of ₹ 66,96,052/-. On appeal before the CIT(A), the .....

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. M/s. Nekkanti Sea Foods, dt. 13-03-2017. 4. On the other hand, Ld.DR vehemently argued that the provisions of Section 14A can be applied in case even in the absence of exempt income but in case, where the investment has potential to yield exempt income. 5. We have heard the rival submissions and perused the material on record. The issue in the present appeal is whether the provisions of Section 14A of the Act can be applied even in the absence of exempt income. This issue is no longer res inte .....

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April 1962, provides for disallowance of the expenditure incurred in relation to income exempted from tax. From 11 th May 2001, a proviso was inserted in Section 14A to clarify that it could not be used to reopen or rectify a completed assessment. Sub-sections (2) and (3) of Section 14A were inserted with effect from 1st April, 2007 to provide for methodology for computing of disallowance under Section 14A. However, the actual methodology was provided in terms of Rule 8D only from 24th March 20 .....

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by the Assessee. 13. In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the A Y in question but where potential exists for exempt income being earned in later A Y s. 14. In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1 st April 1962, it was clarified that "expenses incurred can be allowed only .....

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to Section 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the A Y in question from investments made, not in that A Y, but earlier A Y s. 16. Rule 8D (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of e .....

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dicates a correlation between the exempt income earned in the A Y and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the A Y in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise. 18. The CBDT Circular upon which extensive .....

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e 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being .....

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, 2016 of the High Court of Madras in TCA No. 520 of 2016), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income. " It was further explained that, "The computation of total income in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the sub .....

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cifically deal with this issue. 22. It was suggested by Mr. Hossain that, in the context of Section 57(iii), the Supreme Court in Commissioner Of Income Tax, West v. Rajendra Prasad Moody {1978] 115 ITR 519 (SC) explained that deduction is allowable even where income was not actually earned in the A Y in question. This aspect of the matter was dealt with by this Court in Mis Cheminvest Ltd (supra) where it reversed the decision of the Special Bench of the IT AT by observing as under: "20. S .....

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llowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income", did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: "What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of mak .....

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made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure." 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deducti .....

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