Section 14A Disallowance Cannot Be Made in Absence of Exempt Income: ITAT Bangalore Grants Relief to Shankara Building Products
Overview of the Case
The Income Tax Appellate Tribunal, Bangalore, recently delivered a significant ruling in favour of an assessee engaged in the retail business of home improvement and building products. The Tribunal categorically held that no disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962, can be sustained in a year where the assessee has not earned any exempt income whatsoever. In doing so, the Tribunal directed the deletion of an addition amounting to ₹43.42 lakh that had been made by the Assessing Officer.
Background and Facts of the Case
Shankara Building Products Limited Vs DCIT (ITAT Bangalore)
The assessee, a company carrying on retail operations in the home improvement and building products segment, had filed its return of income for Assessment Year 2020-21 on 30.01.2021, declaring a total income of ₹34,08,79,540/-. The return was subsequently selected for scrutiny, and notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961 were duly issued and served.
Investments and Finance Costs at the Centre of the Dispute
During the course of assessment proceedings, the Assessing Officer ("AO") observed the following:
- The assessee held investments in unquoted equity shares of its subsidiary companies worth approximately ₹48.37 crore.
- The assessee had claimed finance costs amounting to ₹31,69,44,000/- as an expense during the year.
Based on these observations, the AO called upon the assessee to explain why a disallowance under Section 14A should not be computed in respect of expenditure allegedly incurred in relation to investments capable of generating exempt income.
Assessee's Submission Before the AO
The assessee clearly stated before the AO that it had not received any exempt income during the year in question and had made no claim of exemption under Section 10(34) of the Income Tax Act, 1961. Accordingly, the assessee argued that the very foundation for invoking Section 14A was absent, and no disallowance could legally be made.
Assessment Order and First Appellate Proceedings
AO's Position
The AO, vide order dated 06.09.2022 passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961, rejected the assessee's submissions and proceeded to compute and sustain a disallowance of ₹43,42,160/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962.