Sapna Cans Pvt Ltd vs Addl. CIT, Range-22, New Delhi: Disallowance Under Section 14A Reversed for Assessment Year 2014-15

Sapna Cans Pvt Ltd vs Addl. CIT, Range-22, New Delhi: Disallowance Under Section 14A Reversed for Assessment Year 2014-15

Case Number: ITA 6105/DEL/2019

Appellant: Sapna Cans Pvt Ltd, New Delhi

Respondent: Addl. CIT, Range-22, New Delhi

Assessment Year: 2014-15

Order Type: Final Tribunal Order

Date of Order: 20th December 2022

Case Filed On: 18th July 2019

Pronounced On: 20th December 2022

Background of the Case

Sapna Cans Pvt Ltd, a New Delhi-based company, filed an appeal against the Additional Commissioner of Income Tax (Addl. CIT), Range-22, New Delhi, for the assessment year 2014-15. This appeal was filed under case number ITA 6105/DEL/2019, challenging the order passed by the Commissioner of Income Tax (Appeals)-VIII [CIT(A)], New Delhi, dated 3rd May 2019. The original assessment was conducted by the Assessing Officer (AO) on 11th November 2016 under Section 143(3) of the Income Tax Act, 1961.

The primary issue in this case was the disallowance of Rs. 19,69,340/- by the AO under Section 14A of the Income Tax Act, related to expenses purportedly incurred to earn exempt income. The appellant contested this disallowance, arguing that the grounds for such disallowance were not justifiable.

Grounds for Filing the Appeal

The appellant, Sapna Cans Pvt Ltd, raised the following key arguments in its appeal:

• The company had earned only a meager amount of exempt income, specifically Rs. 864/- as dividend income, during the relevant assessment year. Based on the Supreme Court’s decision in the case of Joint Investment Pvt. Ltd. (2015) 59 taxmann.com 295 (SC), the appellant argued that no disallowance under Section 14A was warranted.
• The company further argued that it had sufficient own funds amounting to Rs. 9.55 crore, which were more than enough to cover the non-current investments of Rs. 4.54 crore that generated the exempt income. The appellant cited the Supreme Court’s judgment in South Indian Bank in Civil Appeal Nos. 9606, 9609, 9610, 9611, 9615 of 2011, dated 9th September 2021, to support its claim that no disallowance on account of interest expenses was permissible under Rule 8D(2).

Tribunal Proceedings

The appeal was heard by the Delhi Bench ‘G’ of the Income Tax Appellate Tribunal (ITAT) on 12th December 2022, through video conferencing. The bench was comprised of Judicial Member Shri Kul Bharat and Accountant Member Shri Pradip Kumar Kedia. The appellant was represented by Shri Suresh Singhal, CA, while the respondent was represented by Shri Abhishek Kumar, Senior Departmental Representative (DR).

During the hearing, the tribunal examined the merits of the appellant’s arguments. The counsel for the appellant reiterated the two main points: the insignificant amount of exempt income earned and the adequacy of own funds to cover the investments. The counsel argued that these factors should preclude the application of Section 14A disallowance.

Final Tribunal Order

After considering the submissions made by both parties, the tribunal found merit in the appellant’s arguments. The bench noted that the appellant had indeed earned only a negligible amount of exempt income and that the company’s own funds were more than sufficient to cover the non-current investments. The tribunal concluded that the disallowance made under Section 14A was not justified in this case.

Consequently, the tribunal reversed the disallowance of Rs. 19,69,340/- made by the AO under Section 14A of the Income Tax Act. The appeal filed by Sapna Cans Pvt Ltd was thus allowed, providing relief to the appellant.

Conclusion

The case of Sapna Cans Pvt Ltd vs Addl. CIT, Range-22, New Delhi, underscores the importance of correctly applying the provisions of Section 14A of the Income Tax Act. The tribunal’s decision to reverse the disallowance highlights the necessity for tax authorities to carefully consider the facts of each case, particularly regarding the adequacy of own funds and the actual amount of exempt income earned.

This judgment is a significant reference for similar cases where the quantum of exempt income is minimal, and the taxpayer has sufficient own funds to cover the investments. It reinforces the principle that disallowances under Section 14A should not be applied mechanically but should be based on a thorough analysis of the taxpayer’s financial situation.

Note: The above summary provides an overview of the tribunal proceedings and the final order in the case of Sapna Cans Pvt Ltd. For a more detailed understanding, interested parties are encouraged to review the full text of the tribunal’s order dated 20th December 2022.

Sd/-
(KUL BHARAT)
JUDICIAL MEMBER

Sd/-
(PRADIP KUMAR KEDIA)
ACCOUNTANT MEMBER

Assistant Registrar

Sapna Cans Pvt Ltd vs Addl. CIT, Range-22, New Delhi: Disallowance Under Section 14A Reversed for Assessment Year 2014-15