No Section 14A disallowance without exempt income and premises

No Section 14A disallowance without exempt income and premises vacation compensation is allowable revenue expenditure.

Issue

Whether any disallowance under Section 14A read with Rule 8D can be made in an assessment year where the assessee has earned no exempt income.
Whether compensation paid by an assessee to secure vacant possession of premises taken on a leave-and-license basis for 60 months constitutes allowable revenue expenditure under Section 37(1) or capital expenditure.

Facts

Issue I (Section 14A Disallowance):
- The assessee earned no exempt income during the relevant assessment year.
- The Revenue proposed a disallowance under Section 14A of the Income-tax Act, 1961 by relying on statutory provisions and relevant CBDT circulars.
Issue II (Business Expenditure under Section 37(1)):
- The assessee paid compensation amounting to Rs. 2.5 crores for getting premises vacated.
- The said premises were acquired/used on a leave-and-license basis for a period of 60 months for the purpose of the assessee’s business operations.
- The Revenue contended that the compensation paid gave an enduring benefit and should be treated as capital expenditure.

Decision

Issue I: Confirmed in favor of the assessee. Where no exempt income is earned in the relevant assessment year, the question of making a disallowance under Section 14A does not arise. The issue is squarely covered by binding precedents of the High Court and gives rise to no substantial question of law. [Paras 3 and 4]
Issue II: Confirmed in favor of the assessee. Compensation of Rs. 2.5 crores paid to vacate premises taken on leave-and-license for 60 months is an expenditure incurred for facilitating business operations and is directly allowable as revenue expenditure under Section 37(1). [Para 6]

Key Takeaways

Prerequisite of Exempt Income: Section 14A cannot operate in a vacuum; earning actual exempt income during the relevant previous year is a mandatory precondition for triggering disallowance calculations.
Premises Vacation Charges as Revenue Outlay: Expenditure incurred to remove encumbrances or secure possession of operational business premises taken on lease or license does not create an asset of enduring capital nature and remains allowable as business expenditure under Section 37(1).

HIGH COURT OF BOMBAY

Principal Commissioner of Income-tax

Tata Realty & Infrastructure Ltd.

B. P. COLABAWALLA and FIRDOSH P. POONIWALLA, JJ.

IT APPEAL NO. 10 OF 2020^†

JANUARY 28, 2026

Abhishek Mishra, Adv. for the Appellant. Sukhsagar Syal, Adv. for the Respondent.

ORDER

1. This Appeal is filed by the Revenue challenging the order passed by the ITAT dated 9th May 2019.

2. According to the Revenue, the following 3 questions of law arise for our consideration:-

“i.

Whether on the facts and circumstance of th case and in law, the Hon’ble ITAT was right in holding that the provisions of section 14A will not be applicable when there is no exempt income earned by the assessee during the year failing to appreciate the clarification in Board’s Circular No. 5/2014 dated 11.02.2014 wherein it is clearly laid down that expenses which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the Financial Year or not?

ii.

Whether on the facts and circumstance of the case and in law, the Hon’ble ITAT was correct in not noticing CBDT Circular No. 5/2024 when it is judicially acknowledged that CBDT Circulars constitute important clarifications of legislative intent?

iii.

Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal was right in holding that the expenditure on amortization of tenancy right is not of Capital nature failing to appreciate that the tenancy right acquired by the assessee has resulted in an enduring benefit?”

3. As far as questions (i) and (ii) are concerned, we find that the same are squarely covered by a decision of this Court in the case of Pr. CIT v. Morgan Stanley India Securities (P.) Ltd. [IT Appeal No. 1701 of 2017 dated 21-1-2020]. Questions (i) and (ii), as raised in the present Appeal, are the exact questions that were raised for the consideration of this Court in Income Tax Appeal No. 1701 of 2017. The Division Bench of this Court in the case of Morgan Stanley India Securities (P.) Ltd (supra) has clearly held that where there was no exempt income that was earned in the relevant Assessment Year, the question of disallowance under Section 14A would not arise. They drew support from a view taken by this Court in the Income Tax Appeal No. 266 of 2017 Pr. CIT v. India Debt Management (P.) Ltd. (Bombay), decided on 15th April 2019].

4. Once we find that the issues raised in questions (i) and (ii) above are squarely covered by the decision of this Court in Morgan Stanley India Securities (P.) Ltd (supra), we do not find that questions (i) and (ii) give rise to any substantial questions of law.

5. As far as question (iii) is concerned, we find that this issue also does not give rise to any substantial question of law. On this particular issue, the findings of the Tribunal can be found in paragraphs 10 to 14 of the impugned order. The Tribunal, in fact, held that the compensation paid by the Assessee of Rs.2.5 Crores to Brandon and Company Pvt. Ltd. for vacating the premises occupied by them and availing of the said premises on a leave and license basis for a period of 60 months on the same terms at which said premises were given by Ewart Investments Ltd to Brandon and Company Pvt. Ltd. amounted to a Revenue expenditure and not a capital expenditure as held by the Assessing Officer. The Tribunal, to come to this conclusion, placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. 233 ITR 468 (SC).

6. After going through the impugned order as well as the decision of the Hon’ble Supreme Court in the Madras Auto Service (P.) Ltd. (supra), we do not find anything objectionable in the findings given by the Tribunal, as well CIT (Appeals), that the compensation of Rs.2.5 Crores paid by the Assessee to Brandon and Company Pvt. Ltd. is nothing but a Revenue expenditure.

7. We accordingly find that question (iii) also does not give rise to any substantial question of law. Accordingly, the above Appeal is dismissed. However, in the facts and circumstances of this case, there shall be no order as to costs.

8. This order will be digitally signed by the Private Secretary/Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.