· Assessee filed its return of income making no suo-moto disallowance u/s 14A, as assessee had not earned any exempt income during the year under consideration.
· The AO, however, relying upon the judgment of Special Bench of ITAT Delhi in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318, held that section 14A would apply even if the investment has not actually yielded any income during the year, and thus, made an addition to the returned income of assessee.
· The CIT(A) also held that the provisions of section 14A would apply even where investments do not give rise to exempt income during the year. In this regard, CIT(A) relied upon the Special Bench judgment in the case of Cheminvest Ltd. as well as the Circular No. 5/2014 dated 11.02.2014 issued by CBDT.
· ITAT, however, held that when the assessee has not earned any exempt income during the year, there could not be any disallowance. Tribunal further observed that the decision of the Special Bench of ITAT had been reversed by the Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 378 ITR 33, wherein it was held that section 14A would not apply if assessee had not received any exempt income in the year.
· The High Court was of the view that the CBDT Circular No. 5/2014 upon which extensive reliance was placed, only refers to the word ‘includible’ occurring in the title to Rule 8D as well as the title to section 14A. The High Court further concluded that the decision of the Court in Cheminvest Ltd. (supra) did not require reconsideration, in view of the Circular No. 5/2014 of the CBDT.
· Therefore, the Court concluded that no disallowance u/s 14A was called for in the year under consideration, because no exempt income was earned during the year. The Court further held that the CBDT Circular No. 5/2014 cannot override the expressed provisions of section 14A read with Rule 8D.
For further reading, refer the attachment.
Further Reading