11. Disallowance of expenditure – Exempt income – Section 14A – A. Y. 2011-12 – Section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year

CIT vs. Chettinad
Logistics (P.) Ltd.; [2017] 80 taxmann.com 221 (Mad)

The assessee was engaged
in the business of trading, clearing and forwarding. The Assessing Officer had
added certain amount by disallowing expenditure u/s. 14A of the Act, 1961. The
Commissioner (Appeals) deleted the addition. During the course of arguments
before the Tribunal, the assessee advanced a submission, that in cases, where
investments were made in sister concern (s) out of interest free funds, for
strategic purposes, the provisions of section 14A could not be invoked. The
Tribunal remanded the matter to the Assessing Officer so as to reach a
conclusion as to whether investments had been actually made in sister concerns
of the assessee, out of interest free funds

On appeal by the Revenue,
the Madras High Court held as under:

“i)  This
exercise, in the given facts which emerge from the record, was clearly
unnecessary, as the Commissioner (Appeals) had returned the finding of fact
that no dividend had been earned in the relevant assessment year. Section 14A,
can only be triggered, if, the assessee seeks to square off expenditure against
income which does not form part of the total income under the Act.

ii)  The
Legislature, in order to do away with the pernicious practice adopted by the
assessees, to claim expenditure, against income exempt from tax, introduced the
said provision. In the instant case, there is no dispute that no income i.e.,
dividend, which did not form part of total income of the Assessee was earned in
the relevant assessment year. Therefore, the addition made by the Assessing Officer
by relying upon section 14A, was completely contrary to the provisions of the
said section.

iii)  The
revenue submitted that it could disallow the expenditure even in such a
circumstance by taking recourse to Rule 8D. Rule 8D only provides for a method
to determine the amount of expenditure incurred in relation to income, which
does not form part of the total income of the assessee. Rule 8D cannot go
beyond what is provided in section 14A. Therefore, rule 8D cannot come to the
rescue of the revenue.