S. 14A/ Rule 8D: No disallowance can be made if there is no exempt income. Cheminvest (SB) & CBDT Circular are not good law
In AY 2009-10, the assessee held investments worth Rs. 14.05 crore and incurred interest expenditure of Rs. 34.80 lakhs. The assessee claimed that no disallowance u/s 14A & Rule 8D could be made as the investments were made out of own funds and no income was derived from the investments. The AO rejected the claim and made a disallowance of Rs. 19.28 lakhs though the CIT(A) deleted it. Before the Tribunal the department relied on Cheminvest Ltd 121 ITD 318 (SB) & Circular No.5/2014 dated 11.2.2014 and argued that even if the assessee has not earned any exempt income, still disallowance u/s 14A read with Rule 8D has to be made and it is mandatory. HELD by the Tribunal dismissing the appeal:
No doubt in Cheminvest Ltd vs. ITO 121 ITD 318 (SB) the Special Bench of the Tribunal has held that disallowance u/s 14A can be made even in the year in which no exempt income has been earned or received by the assessee. This decision of Special Bench of the Tribunal has been impliedly overruled by the decisions of High Courts in Shivam Motors P Ltd (All HC), CIT vs. Corrtech Energy Pvt. Ltd (Guj HC), CIT vs. Delite Enterprises (Bom HC), CIT vs. Lakhani Marketing (P&H HC), CIT vs. Winsome Textiles Industries Ltd 319 ITR 204 (P&H) where it has been held that when there is no exempt income and no claim for exemption, s. 14A and Rule 8D have no application and no disallowance can be made.