THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. M/S WINSOME DIAMONDS AND JEWELLERY LTD

This Tax Appeal under Section 260A of the Income Tax Act, 1961[for short, 'the Act, 1961'] is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'B', Ahmedabad dated 20th August, 2019 in the ITA No.3982/Mum/2018 for the A.Y. 201415. 2. The Revenue has proposed the following solitary substantial question of law for the consideration of this Court: “Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is correct in upholding the order of the CIT(A) that no disallowance u/s 14A can be made if there is no tax free income earned during the year ignoring CBDT’s Circular No.5/2014 dated February 11, 2014 which states that disallowance of expenses for earning exempt income u/s 14A of the Income Tax Act, 1961 C/TAXAP/209/2020 ORDER read with Rule 8D of the Income Tax Rules, 1962, would be attracted even if corresponding income has not been earned during the year ?”

It appears from the materials on record that in the course of the assessment proceedings, the Assessing Officer noticed that the assessee had made investment to the tune of Rs.1,44,25,14,851/- on 1st April, 2013. The Assessing Officer noticed that the assessee had not made any disallowance under Section 14A read with Rule 8D of the Income Tax Rules in respect of any expenditure incurred for the aforesaid investment. The case of the assessee before the Assessing Officer was that the interest free funds were used for investing in equity shares and in such circumstances, no disallowance was required to be made under Section 14A read with Rule 8D of the Income Tax Rules. The assessee also declared that no exempt income had been claimed and therefore the disallowance under Section 14A should not be made. The Assessing Officer rejected the case put up by the assessee and after referring to the CBDT circular No.5/2014 held that the disallowance can be made by invoking Section 14A of the Act, 1961 though no income had been earned by the assessee claimed as exempt during the year under consideration.

In such circumstances referred to above, the Assessing Officer computed disallowance under Section 14A read with Rule 8D of the Income Tax Rules to the amount of C/TAXAP/209/2020 ORDER Rs.9,44,61,777/- and added to the total income of the Delhi & Others.

The Revenue being dissatisfied with the order passed by the CIT(A) went in appeal before the Tribunal.

The Tribunal dismissed the appeal thereby affirming the order passed by the CIT(A).

In such circumstances, the Revenue is here before this Court with the present appeal.

We take notice of the following findings recorded by the Tribunal in its impugned order:

In our opinion, the CIT(A) as well as the Appellate Tribunal rightly applied the dictum as laid by the Supreme Court in the case of Maxopp Investment Ltd.(supra). In Maxopp Investment Ltd.(supra), the Supreme Court held that as the assessee had not made any claim for the exemption of any income from payment of tax, the disallowance under Section 14A of the Act cannot be made. To attract the provisions of Section 14A of the Act, 1961, it is necessary that the assessee should have earned any exempt income. If the assessee has not earned an exempt income and has not claimed so in his return of income, then the provisions of Section 14A would not be applicable.

The concurring finding of fact recorded by the two authorities is that in the year under consideration, the assessee company had not earned any exempt income and had not claimed any such exempt income in his return of income.

In view of the aforesaid, this Tax Appeal fails and is hereby dismissed. (VIKRAM NATH, CJ) (J. B. PARDIWALA, J) NAIR SMITA V./Radhan