Section 14A of the Income Tax Act does not apply if no exempt income has been received or receivable during the relevant previous year.

JUDGMENT

CM APPL.43156/2022

1. Keeping in view the averments in the application, the delay in re- filing the appeal is condoned.

2. Accordingly, the application stands disposed of.

ITA 380/2022

3. Present Income Tax Appeal has been filed challenging the Impugned Order dated 31st January, 2018 passed by the Income Tax Appellate Tribunal (`ITAT') in ITA No. 3707/Del/2013 & ITA No.4203/Del/2013 for the Assessment Year 2010-11.

4. Learned Counsel for the Appellant states that the ITAT has erred in not disallowing the interest expenses amounting to Rs.10,07,34,000/-, being expenditure incurred in relation to exempt income, under the provisions of Section 14A of the Income Tax Act, 1961 (`the Act'). He submits that ITAT has erred in holding that earning of exempt income during the year under consideration is a sin qua non for application of Section 14A of the Act.

5. He states that the term `in relation to' as used in Section 14A of the Act contemplates direct and/or proximate nexus between `expenditure incurred' and `earning of exempt income'.

6. He further states that the ITAT has erred in deleting the disallowance under Section 14A of the Act without considering the legislative intent of Section 14A of the Act which has been further clarified by CBDT Circular No.5/2014 dated 11th February, 2014.

7. A perusal of the paper book reveals that the authorities below have given concurrent finding of fact that the assessee did not earn any exempt income during the year under consideration. The relevant extract of the ITAT order is reproduced hereinbelow:

"76.The facts qua the disallowance are that the assessee submitted before the Assessing Officer that no dividend income was earned by the assessee during the relevant year, thus no disallowance was called for but the Assessing Officer rejected the contention of the assessee and invoking section 14A of the Act read with Rule 8D of Income-tax Rules, 1962 (in short `the Rules') made disallowance of Rs.10,07,34,000/-.

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81. Before us, there is no dispute on the fact that no dividend income was earned by the assessee during the relevant year and therefore respectfully following the finding of the Hon'ble Delhi High Court, we hold that no disallowance is required to made in terms of section 14A of the Act in the case of the assessee as no exempt income is received or receivable during the relevant year. Accordingly, we allow the ground No.1 of the appeal of the assessee and dismiss the ground No. 5 of the appeal of the Revenue.

82. The ground No. 2 of the appeal of the assessee is regarding adding the amount of disallowance made under section 14A of the Act to the cost of the mutual fund units. This ground has been raised without prejudice to the ground No. 1 of the appeal of the assessee. Since the ground No. 1 has already been allowed in favour of the assessee, the ground No. 2 is rendered infructuous and accordingly dismissed."

8. In the opinion of this Court, the present case is covered by the Division Bench judgment in Cheminvest Ltd. vs. CIT, [2015] 61 Taxmann.com 118 (Delhi), wherein this Court has held that the expression 'does not form part of the total income' in Section 14A of the Act means 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.

9. Furthermore, this Court in Pr. Com