Facts of the Case

The present appeal was filed by the Revenue challenging the order dated 30.08.2022 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2017–18.

The dispute pertained to the deletion of disallowance amounting to ₹3,24,69,741/- made under Section 14A of the Income Tax Act, 1961. The Assessing Officer had invoked Section 14A despite the fact that the assessee had not earned any exempt income during the relevant assessment year.

 Issues Involved

  1. Whether disallowance under Section 14A of the Income Tax Act, 1961 can be made when no exempt income has been earned by the assessee during the relevant assessment year.
  2. Whether the order of the ITAT deleting such disallowance gives rise to any substantial question of law.

 Petitioner’s Arguments (Revenue)

  • The Revenue contended that the ITAT erred in deleting the disallowance made under Section 14A.
  • It was argued that expenditure incurred in relation to investments capable of generating exempt income should be disallowed irrespective of whether exempt income was actually earned during the year.

 Respondent’s Arguments (Assessee)

  • The assessee submitted that no exempt income was earned during the relevant assessment year.
  • Therefore, invocation of Section 14A was unjustified and contrary to settled judicial precedents.
  • The assessee relied on binding judicial decisions supporting the proposition that no disallowance can be made in absence of exempt income.

 Court Order / Findings

  • The Hon’ble Delhi High Court observed that the issue is no longer res integra and is covered by binding precedents.
  • The Court relied on the following judgments:
    • Cheminvest Ltd. v. CIT (2015) 378 ITR 33
    • CIT v. Chettinad Logistics Pvt. Ltd. [2017] 80 taxmann.com 221 (Madras)
    • PCIT v. Modern Info Technology Pvt. Ltd. (Delhi High Court, 03.05.2023)
  • It was noted that the SLP against Chettinad Logistics Pvt. Ltd. had already been dismissed by the Supreme Court.
  • The Court held that no substantial question of law arises in the present case.
  • Accordingly, the appeal filed by the Revenue was dismissed.

 Important Clarification

  • Section 14A disallowance cannot be invoked in absence of exempt income.
  • The judicial position is now well-settled and consistently followed across High Courts.
  • Mere existence of investments does not justify disallowance unless exempt income is actually earned.

Sections Involved

  • Section 14A of the Income Tax Act, 1961
  • Relevant Rules under Income Tax Rules (Rule 8D – implied context)

 Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS12052023ITA2722023_154202.pdf

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