Disallowance u/s. 14A – A. Y. 2004-05 – Section 14A will not apply if no exempt income is received or receivable during the relevant previous year

Cheminvest Ltd. vs. CIT; [2015] 61 taxmann.com 118 (Delhi)

In
the case of the assessee Cheminvest Ltd., the Special Bench of the ITAT
in [2009] 121 ITD 318 (DELHI)(SB) held that section 14A disallowance can
be made in year in which no exempt income has been earned or received
by assessee. It referred to the decision of Apex Court in case of CIT
vs. Rajendra Prasad Moody [1978] 115 ITR 519 to settle this controversy.

In the appeal by the assessee, the following question was raised before the Delhi High Court:

“Whether
disallowance under Section 14A can be made in a year in which no exempt
income has been earned or received by assessee?

The High Court held in favour of assessee as under:
“(i)
The Special Bench has relied upon the decision of the Supreme Court in
Rajendra (supra). In such case the Supreme Court held that Section
57(iii) does not say that expenditure shall be deductible only if any
income is made or earned. The decision of Supreme Court was rendered in
context of allowability of deduction u/s. 57(iii). Thus, such decision
could not be used in reverse to contend that even if no income has been
received, the expenditure incurred can be disallowed u/s. 14A.

(ii)
The expression ‘does not form part of total income’ in Section 14A
envisages that there should be an actual receipt of income, which is not
includible in the total income, for the purpose of disallowing any
expenditure in relation to said income.

(iii) In other words,
Section 14A will not apply if no exempt income is received or receivable
during the relevant previous year.”