2023 (10) TMI 513 - AT - Income Tax

Tribunal rules disallowance under section 14A only applies when exempt income is earned

The Tribunal ruled in favor of the assessee, holding that a disallowance cannot be made under section 14A of the Income Tax Act when no exempt income was ... Disallowance u/s 14A r.w.r. 8D - assessee did not earn any exempt income during the year - Scope of amendment of section 14A - HELD THAT:- Respectfully following the decision of Era Infrastructure (India) Ltd. [2022 (7) TMI 1093 - DELHI HIGH COURT] we hold that the operation of explanation to provisions u/s 14A by way of Finance Act, 2022 is only prospective in nature and cannot be made applicable to the year under consideration. Since it is an undisputed fact that there is no dividend income earned in the relevant previous year, by respectfully following case of Cheminvest Ltd [2015 (9) TMI 238 - DELHI HIGH COURT] we hold that Section 14A read with Rule 8D applies only in relation to an assessee’s exempt income and not otherwise. Decided against revenue. Issues:The main issue in this case is whether a disallowance can be made under section 14A of the Income Tax Act, 1961, read with Rule 8D of Income Tax Rules, even if the assessee did not earn any exempt income during the assessment year 2013-14.Summary:Issue 1: Application of Section 14A in the absence of exempt income:The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance under section 14A of the Income Tax Act, 1961. The sole question was whether a disallowance could be made under section 14A when the assessee did not earn any exempt income during the relevant year. The Revenue argued that the amendment to section 14A made it applicable regardless of the earning of exempt income. However, the assessee relied on precedents to support the view that no disallowance could be made if no exempt income was earned during the year.Issue 2: Prospective nature of the amendment:The Tribunal examined the effect of the amendment to section 14A by the Finance Act, 2022, which included a non obstante clause and explanation. Citing the decision of the Hon'ble Delhi High Court in a similar case, the Tribunal held that the operation of the explanation to section 14A was prospective in nature and could not be applied to the assessment year in question. The Tribunal emphasized that the amendment, being for the 'removal of doubt,' did not have retrospective effect.Conclusion:Based on the precedents and the prospective nature of the amendment, the Tribunal ruled in favor of the assessee, stating that section 14A read with Rule 8D applies only in relation to an assessee's exempt income and not otherwise. Consequently, the appeal of the Revenue was dismissed, affirming that no disallowance could be made in the absence of dividend income earned during the relevant year.This judgment clarifies the application of section 14A of the Income Tax Act, emphasizing that disallowances under this provision are linked to the earning of exempt income and cannot be made when no exempt income is earned during the relevant assessment year. The decision underscores the prospective nature of amendments to tax laws and the importance of considering legal precedents in interpreting and applying tax provisions.