We are pleased to release a Tax Alert summarizes a recent ruling of Delhi High Court (HC), in case of
Cheminvest Ltd. (Taxpayer) v. CIT on the issue whether expense disallowance for exempt income is warranted even if in a particular tax year, no exempt income is actually earned.
Overruling Special Bench’s (SB) ruling in Taxpayer’s case and following its own prior ruling in the case of CIT v. Holcim India (P) Ltd., the Delhi HC held that there can be no disallowance of expense if no exempt income is actually earned during the relevant tax year.
The HC also distinguished Supreme Court’s ruling in the case of CIT v. Rajendra Prasad Moody (Rajendra Prasad Moody ruling) which held that if any expenditure is incurred for earning any taxable income, the same is deductible even if no positive income is earned in a particular tax year. The HC held that this decision cannot be used in reverse to infer that even if no exempt income is earned, expenditure disallowance will be triggered.
The applicability of disallowance in a tax year where no exempt income is earned is a contentious issue where judicial trend of HC rulings is currently in taxpayer’s favor. The present HC ruling is consistent with the favorable trend but is significant considering that it has distinguished Rajendra Prasad Moody’s ratio also which was not explicitly considered in earlier favorable rulings.