No disallowance u/s 14A if assessee not earned any exempt income

Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.

Facts:
(1) The disputed issue in the instant case was:
Whether disallowance under Section 14A can be made in a year in which no exempt income has been earned or received by assessee?

(2) The Special bench 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 v. Rajendra Prasad Moody [1978] 115 ITR 519 to settle this controversy.

The High Court held in favour of assessee as under:

(1) 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 under Section 57(iii). Thus, such decision could not be used in reverse to content that even if no income has been received, the expenditure incurred can be disallowed under Section 14A.

(2) 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.

(3) In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
Editor's Note:

• Section 14A provides for disallowance of expenditure in relation to income not "includible" in total income. The legislative intent is to allow deduction of only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.

• The above position is further clarified by the usage of term 'includible' in the Heading to section 14A which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered.

• Thus, in light of above, CBDT, vide Circular No. 5/2014 dated 11-2-2014 had clarified that Rule 8D read with section 14A provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.

• The Delhi High Court had not referred to this Circular in its verdict.
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