The OPG Energy Pvt. Ltd. filed an appeal under Section 260A of the Income Tax Act, 1961. It was filed against an order passed by the Income Tax Appellate Tribunal. The case was heard and decided upon by the bench of Justice T. S. Sivagnanam and Justice Pushpa Sathyanarayana.
Facts of the Case
An appeal was filed by M/s. OPG Energy Pvt. Ltd, the assessee under Section 260A of the Income Tax Act, 1961 challenging the order on the file of Income Tax Appellate Tribunal, Chennai, ‘A’ Bench for the assessment year 2014-15.
The assessee company is a resident domestic company which did not hold any substantial public interest. The company filed for the return of income for the assessment year under consideration (2014-15). Eventually, they filed a revised return of income disclosing Rs. 2.7 crores.
The return was processed under Section 143(1) of the Act and thereafter, the case was selected for scrutiny. A notice under Section 143(2) of the Act was also issued. During the course of scrutiny, it was found that the assessee company made investments in various companies amounting to Rs.1,23,59,30,000/-.
A show cause was issued to the assessee company as to why disallowance under Section 14A of the Act should not be made against the said investments. The assessee replied that they had sufficient funds as reserves under the interest on loans borrowed for regular business and therefore, prayed that the disallowance may not be made.
The Assessing Officer reworked the disallowance amounting to Rs.5,57,26,868/-. by applying Rule 8D of the Income Tax Rules. The appeal against this order was allowed by the Commissioner of IT. The Revenue challenged the said order before the Tribunal which was also dismissed.
Issues Raised
Whether in facts or in circumstance, the Tribunal was right in deleting the disallowance made under Section 14A read with Rule 8D on the ground that when there was no earning of exempt income during the assessment year, then the provisions of Section 14A cannot be invoked?
Whether the Tribunal was right in law in not considering the fact that even in the amendment to Rule 8D brought in Finance Act, 2016 with regard to the quantum of expenditure that could be disallowed under Rule 8D whereby the same has been limited to the extent of expenditure claimed, there is no bar on invoking Section 14A when there is no earning of exempt income during the relevant previous year?
Court’s Observations
The Court observed an identical substantial question of law was considered by this Court. In CIT Vs. Celebrity Fashion Ltd to which, one of us (TSSJ) was a party. In this case, it was held that in terms of Section 14A of the Act, only expenditure, which was proved to be incurred in relation to earning of tax-free income, could be disallowed. This provision could not be extended to disallow expenditure, which was assumed to have been incurred for earning tax-free income.
It was further held that to apply provisions of Section 14A of the Act, Assessing Officer should have recorded a finding as to how Sub-Section (1) of Section 14A of the Act would stand attracted and in absence of any such finding, the disallowance made was not justifiable.
Court’s Decision
The Court held that the facts in the instant case are identically cogent. There is no opinion recorded by the Assessing Officer as to how sub-section (1) of Section 14A of the Act would stand attracted.
The Court dismissed the tax case appeal.
Read the original judgment here.
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