Section 14A disallowance dismissed following Era Infrastructure precedent confirming Finance Act 2022 amendment is prospective only

ITAT Delhi dismissed revenue's appeal regarding Section 14A disallowance, following Delhi HC precedent in Era Infrastructure that Finance Act 2022 amendment is prospective, not retrospective, and no disallowance applies without exempt income. Tribunal upheld CIT(A)'s decision allowing deferred revenue expenditure deduction, ruling entire upfront loan fee allowable in incurrence year regardless of accounting treatment. For TDS under Section 195, Tribunal deleted disallowance following Welspring Universal precedent, holding commission paid to foreign agent for services rendered outside India not chargeable to tax in India under Sections 5(2) or 9(1).

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Issues Involved
1. Deletion of disallowance made under Section 14A of the Income-tax Act, 1961.
2. Deletion of disallowance of deferred revenue expenditure.
3. Disallowance under Section 40(a)(i) for brokerage and commission paid to a foreign agent.

Summary

Issue 1: Deletion of Disallowance under Section 14A
The first issue addressed was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance made under Section 14A of the Income-tax Act, 1961, in the absence of any exempt income during the year. The Tribunal noted that the issue was no longer res integra due to the Supreme Court's decision in Maxopp Investments and the Jurisdictional High Court's decision in Joint Investments, which held that no disallowance could be made under Section 14A if no exempt income was earned during the year. The Tribunal also referenced the Delhi High Court's decision in PCIT vs Era Infrastructure (India) Ltd, which clarified that the amendment to Section 14A by the Finance Act, 2022, is not retrospective. Consequently, the Tribunal dismissed the revenue's appeal on this ground.

Issue 2: Deletion of Disallowance of Deferred Revenue Expenditure
The next issue was whether the CIT(A) was justified in deleting the disallowance of Rs 5,37,34,610/- made by the Assessing Officer (AO) on account of deferred revenue expenditure. The assessee had availed a term loan of Rs 138 crores from Yes Bank and incurred facilitation/upfront fees of Rs 8 crores, which was partly debited in the profit and loss account and partly shown as deferred revenue expense. The CIT(A) noted that while the accounting standards required deferred recognition, Section 36(1)(iii) of the Income-tax Act does not mandate deferment of such expenses. Since the loan was utilized for business purposes and the entire expenditure was incurred and paid during the year, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal on this ground.

Issue 3: Disallowance under Section 40(a)(i) for Brokerage and Commission Paid to Foreign Agent
The final issue was whether the CIT(A) was justified in confirming the disallowance of Rs 2,80,85,949/- under Section 40(a)(i) for brokerage and commission paid to Shye International, a Hong Kong-based company, for services rendered in China. The Tribunal found that the commission was paid for services rendered outside India and thus was not chargeable to tax in India under Sections 5(2) and 9(1) of the Income-tax Act. The Tribunal cited various judicial precedents, including the Delhi Tribunal's decision in Welspring Universal vs JCIT and the Supreme Court's dismissal of the revenue's Special Leave Petition in PCIT vs Vedanta Ltd, to support its conclusion. Consequently, the Tribunal deleted the disallowance and allowed the assessee's appeal on this ground.

Conclusion
In summary, the Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal. The order was pronounced in the open court on 20/10/2023.

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