HC: No Substantial Question of Law Arises in Revenue’s Section 14A Appeal

In the present case, the Revenue filed an appeal under Section 260A challenging the ITAT’s order for AY 2018-19. Earlier, the Principal Commissioner of Income Tax (PCIT) had passed an order under Section 263, holding that the Assessing Officer’s order under Section 153A was erroneous and prejudicial to the interest of Revenue because it did not make a disallowance under Section 14A read with Rule 8D.

The Assessee contended that since no exempt income was earned during AY 2018-19, no expenditure could be disallowed under Section 14A. The ITAT accepted this contention and decided in favour of the assessee. The Revenue, aggrieved, preferred the present appeal.

Main Issue: Whether the ITAT was correct in holding that no disallowance under Section 14A could be made in the absence of exempt income, thereby rendering the PCIT’s order under Section 263 unsustainable.

HC’s Decision: The High Court upheld the ITAT‘s ruling and denied the Revenue’s appeal. Since the Assessee did not receive any exempt income during the 2018-19 academic year, the Court noted that no disallowance under Section 14A was appropriate. It pointed out that the HC’s earlier, legally binding rulings in Pr. CIT v. IL & FS Energy Development Company Ltd. and Pr. CIT v. Era Infrastructure (India) Ltd., which stated that Section 14A disallowance could not be used in years in which no exempt income was earned, were correctly cited by the ITAT.

The Court decided that the assessment order could not be deemed incorrect or detrimental to the Revenue’s interests because the Assessing Officer‘s opinion aligned with the jurisdictional HC’s decisions. It also stressed that the AO’s position was at least tenable, which was enough to prevent interference under Section 263 even if the PCIT didn’t agree. As a result, the appeal was denied because there was no significant legal issue to consider.

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