The Delhi Bench of the Income Tax Appellate Tribunal in the case Indian Farmers Fertiliser Versus DCIT observed and has held that the disallowance under Section 14A of the Income Tax Act, 1961 is not being warranted if no exempt income is being earned.
The two-member bench comprising of Judicial Member, Anubhav Sharma and the Accountant Member, Anil Chaturvedi in the case observed and stated that Section 14A envisages that there should be actual receipt of income, and hence the Section 14A of the Income Tax Act, 1961 will not be applied where no exempt income is being received or is to be receivable during the relevant previous year.
In the present case, the assessee or appellant being a multi-state cooperative society registered under the Multi-State Cooperative Societies Act 2002. Therefore, the assessee is engaged in the business of manufacturing and trading of chemical fertilizers through the various operating units of the assessee.
The said case of the assessee or appellant was being selected for scrutiny and assessment. During the course of assessment proceedings, it has been noted by the assessee has earned a tax-free income by way of dividends. It has also been stated by him that the assessee had investments totalling of Rs. 1701.83 crores, as it is being opposed by the assessee to Rs. 798.49 crores in the said previous assessment year.
It has also been noted by the AO that the assessee had incurred an interest and other expenses. AO being of the said view that interest-bearing funds had been used for making the investments. Therefore, the said provision is been invoked of Rule 8D reading with Section 14A and worked out the disallowance under Rule 8D(2)(iii) of the Income-tax Rules at Rs. 6.25 crores. Therefore, the court on an account of the disallowance of interest expenditure as stated under Rule 8D(2)(ii), worked out the disallowance of Rs. 49.71 crores, and thus the aggregate disallowance which is being workout was Rs. 55,960,00,000 by AO.
The matter was being carried by assessee before the CIT (A), who has granted partial relief to the assessee wherein deleting the disallowance to the extent of Rs. 49.71 crores but the bench upheld the disallowance as stated under Rule 8D(2)(iii) of Rs. 6.25 crore.
Before the court, it has been contended by the assessee that disallowance under Rule 8D(2)(iii) of the Income-tax Rules be restricted to investments, which actually yielded an exempt income and since an exempt income of Rs. 2.48 crores have been earned by the assessee and the said disallowance should be restricted to that amount.
It has been determined by the tribunal that there has been no such finding by the lower authorities that all the investments have not been produced exempt income.
The case was returned by ITAT to the desk of AO and directed the assessee ato calculate the disallowance as stated under Rule 8D(2)(iii) of the Income-tax Rules which being based on exempt income and is as per the law prescribe
