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CIT vs. Shivam Motors (P) Ltd (Allahabad High Court)
May, 23rd 2014

No s. 14A & Rule 8D disallowance if there is no tax-free income

In AY 2008-09, the assessee claimed that no s. 14A & Rule 8D disallowance could be made on the ground that (i) the assessee had not earned any tax-free income during the year and (ii) the assessee had sufficient surplus fund and borrowed funds were not utilized for making the tax-free investments. The AO rejected the claim and made a disallowance though the CIT(A) and Tribunal (included in file) deleted it on the basis that no s. 14A disallowance could be made in the absence of tax-free income. The Tribunal noted the judgement in Cheminvest 121 ITD 318 (Delhi) (SB) (which holds that s. 14A disallowance has to be made even if there is no tax-free income) but followed Siva Industries (Che). On appeal by the department to the High Court HELD dismissing the appeal:

S. 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of law.

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