After five years of wait , finally , ITAT Special Bench order in case of Cheminvest Ltd vs CIT  121 ITD 318 (Delhi) (SB) has been set aside by Delhi High Court vide its judgement dated 2nd September 2015 . This Special Bench order must have become basis for dis-allowance u/s 14A in thousands of cases all around country. So , its great relief for the tax payers who have suffered such an illogical dis-allowance that even if you do not earn income , the punishment in form of dis-allowance u/s 14A will have to bear with . The judgment of Delhi High Court is quite important in the sense that the expression ‘does not form part of the total income’ in Section 14A has been interpreted to mean actual receipt of exempt income .
Special Bench Order in Cheminvest Case
The facts involved in the case was that the assessee had borrowed funds for the purpose of investing in shares. The shares were held for capital purposes as well as for investment purposes. In AY 2004-2005, the assessee did not receive any dividend on the said shares and so there was no exempt income. The issue before the the Special Bench was
whether the interest expenditure incurred by the assessee on the said borrowings used for purposes of investment in shares could be disallowed u/s 14A even though the assessee had not received any tax-free income in respect of the said shares.
Special Bench vide its order 5th August 2009 decided against the assessee mainly on following :
(i) Sec. 14A disallows expenditure “in relation to income which does not form part of total income” and in order for the expenditure to be disallowed, actual income need not be earned;
(ii) The fact that the expenditure is allowable u/ss 36 (1) (iii) / 57 is irrelevant because s. 14A has overriding effect and supercedes all other provisions;
(iii) The disallowance has to be of the entire amount of the expenditure so related and cannot be reduced by the receipt of interest which has no relation to such expenditure.
The High Court has now set aside the order of the Special Bench by relying on its own order in CIT v. Holcim India (P) Ltd. 57 taxmann.com 28 (Delhi) that section 14A will not apply if the exempt income is not received in that year. The hon’ble Delhi High Court hed that the Special Bench wrongly relied on Supreme Court’s order in Rajendra Prasad Mody’s to argue that expenditure is not allowable even if no income was earned . In words of Delhi High Court
“the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is ‘for the purpose of making or earning such income’. Section 14A of the Act on the other hand contains the expression ‘in relation to income which does not form part of the total income.’ The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.”
Ultimately , the Delhi High Court held as under :
22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd. (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd. (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14 A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.
23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages 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.[/infobox]
Rush to Appeal
It is indeed a very welcome order and shall bring relief to thousands of tax payers all around the country who are subjected to an illogical diallowance by Revenue authorities. Readers should also note that special bench order in Cheminvest Ltd have been overruled in a number of other cases .[infobox style=”alert-success”]
Some of which are as under :
- CIT Vs. M/s. Sivam Motors Pvt.Ltd. (Allahabad High Court ) I.T. Appeal No.88 of 2014 dated 5.5.2014
- CIT Vs. Corrtech Energy Pvt. Ltd. (Gujarat High Court) Tax Appeal No.239 of 2014 dated 24.3.2014
- CIT Vs.Delite Enterprises (Bombay High Court ) Tax Appeal No.110 of 2009 dated 26.2.2009
- CIT Vs. M/s. Lakhani Marketing (Punjab & Haryana High Court) ITA No.970 of 2008 dated 2.4.2014
- CIT Vs. Winsome Textiles Industries Ltd. (Punjab & Haryana High Court ) (319 ITR 204)
- In the case of CIT Vs. Winsome Textiles Industries Ltd. (319 ITR 204) the Hon’ble Punjab & Haryana High Court held that when there is no claim for exemption of income in such situation section 14A has no application. Respectfully following the above decisions, we delete the dis-allowance made under section 14A as the assessee has not earned / received for exempt income during the previous year relevant to the assessment year under appeal.[/infobox]
Readers are advised to apply aforesaid order of Delhi High court immediately to their pending appeals .[button href=”https://app.box.com/s/8fu939r8ebnkr1fdk27ykvqrbfujygmq” icon=”glyphicon glyphicon-download” rounded=”btn-box” size=”btn-lg” style=”btn-custom orange” target=”_blank”]Download Delhi HC Order[/button]