Tax Appeal Dismissed for Low Tax Effect, Disallowance Limited to Exempt Income

The Tribunal dismissed the Revenue's appeal due to the low tax effect falling below the prescribed threshold. The Tribunal upheld the deletion of disallowance made under Section 14A read with Section 8D, emphasizing that disallowance should be limited to the extent of exempt income earned. The Tribunal also found that the Ld. CIT(A) did not contravene the amended provisions of Section 14A introduced by the Finance Act, 2022, and upheld the legality of the CBDT Circular No. 05/2014 in this context.

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Issues Involved:
1. Deletion of disallowance made u/s 14A r.w.s 8D where the assessee has not claimed exempt income.
2. Ignoring the amendment made by the Finance Act, 2022 to Section 14A.
3. Legality of CBDT Circular No. 05/2014 regarding disallowance u/s 14A.

Summary:

Issue 1: Deletion of disallowance made u/s 14A r.w.s 8D where the assessee has not claimed exempt income

The Revenue challenged the deletion of a disallowance of Rs. 81,03,223/- made u/s 14A r.w.s 8D by the Ld. CIT(A), arguing that the disallowance is mandatory irrespective of whether exempt income is earned during the year. The Ld. CIT(A) relied on the decision of the Co-ordinate Bench in the assessee's own case for earlier years, holding that disallowance u/s 14A should be restricted to the extent of exempt income earned, and if no exempt income is earned, no disallowance is warranted.

Issue 2: Ignoring the amendment made by the Finance Act, 2022 to Section 14A

The Revenue contended that the Ld. CIT(A) ignored the amendment brought by the Finance Act, 2022, which inserted an explanation to Section 14A clarifying that the provisions apply even if no exempt income has accrued, arisen, or been received during the previous year. The Ld. DR cited the decision of the Coordinate Guwahati Bench in ACIT Vs. Williamson Financial Services Limited and pending SLPs in similar cases to support their argument.

Issue 3: Legality of CBDT Circular No. 05/2014 regarding disallowance u/s 14A

The Ld. DR argued that the Ld. CIT(A) implicitly held CBDT Circular No. 05/2014 to be illegal by restricting the disallowance to the extent of exempt income. The Ld. AR countered that the Circular is not binding on appellate authorities and cannot override express provisions of Section 14A r.w.r 8D. The Tribunal found that the Ld. CIT(A) followed judicial discipline by adhering to the jurisdictional Tribunal's decision rather than the CBDT Circular, and did not hold the Circular as illegal or ultra vires.

Conclusion:

The Tribunal dismissed the Revenue's appeal on the grounds of low tax effect, as the tax effect involved was below the prescribed threshold. The Tribunal also noted that the case did not fall under the exceptions outlined in Para 10(b) of CBDT Circular No. 3 of 2018, as the Ld. CIT(A) did not hold the CBDT Circular as illegal or ultra vires.

Order pronounced in the open Court on 19/05/2023.

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