DCIT 2(2), MUMBAI vs. MEDITAB SPECIALITIES P.LTD, MUMBAI

In view of the aforesaid submissions of the learned Authorised Representative, we are called upon to decide the limited issue, whether the disallowance under section 14A r/w rule 8D has to be restricted to the extempt income earned in a particular assessment year. To counter the aforesaid proposition of the learned Authorised Representative, the learned Departmental Representative has submitted that the provisions of section 14A r/w rule 8D being mandatory in nature, the Assessing Officer has to compute the disallowance under section 14A in terms of the method prescribed under section rule 8D. We are unable to agree with the contention of the learned Departmental Representative. In case of Cheminvest Ltd. v/s CIT, ITA 749/2014, dated 2nd September 2015, the Hon'ble Delhi High Court has held that no disallowance under section 14A of the Act, can be made in the absence of exempt income. In case of CIT v/s Joint Investment Pvt. Ltd., dated 25th February 2015, the Hon'ble Delhi High Court has held that the disallowance under section 14A cannot swallow the entire exempt income. Following the aforesaid ratio of the Hon'ble Delhi High Court, different Benches of the Tribunal have held that disallowance under section 14A r/w rule 8D, cannot exceed the exempt income earned by the assessee in a particular assessment year. In fact, ITAT, Delhi Special Bench, in case of ACIT v/s Vireet Investment Pvt. Ltd. (supra) has held that only investments yielding exempt income during the year can be considered for computing average value of investment. In contrast, the decisions relied upon by the learned Departmental Representative in no way contradict the aforesaid ratio. On a careful reading of the decision in case of Distributors (Baroda) Pvt. Ltd. (supra), Cloth Traders Pvt. Ltd. (supra, ACG Associated Capsules Pvt. Ltd. (supra), we are convinced that these decisions are in no way connected to the issue in dispute in the present appeals. As far as the decisions in Walfort Shares and Stock Brokers (supra), Godrej & Boyce Mfg. Co. Pvt. Ltd. (supra) are concerned, though they are in the context of section 14A of the Act, however, these decisions cannot be said to be laying down the ratio that even in absence of exempt income disallowance under section 14A can be made or the disallowance under section 14A should not be restricted to the exempt income earned in a particular assessment year. Learned Departmental Representative has failed to bring to our notice even a single decision which directly counters the proposition put forward by the learned Authorised Representative. In the aforesaid view of the matter, following the ratio laid down in the decisions referred to above by us, we hold that if in a particular assessment year, the assessee has not earned any exempt income, no disallowance under section 14A, can be made. Similarly, the disallowance under section 14A, cannot exceed the exempt income earned in a particular assessment year. In terms of our aforesaid observations, we direct the Assessing Officer to restrict the disallowance under section 14A, to ` 6,04,377 in assessment year 2008–09 and ` 9,130 in assessment year 2011–12. In assessment year 2012–13, assessee has not earned any exempt income, therefore, no disallowance under section 14A can be Meditab Specialities Pvt. Ltd. made. In view of our reasoning above, the grounds raised by the Department in its appeal have become redundant, hence, dismissed.

Before parting, we must clarify that we have not expressed any opinion on the issue of applicability of section 14A to the investments made in SEZ, which is left open to be decided on its own merit if it arises in any other assessment year.”