2024 (3) TMI 537 - AT - Income Tax

Section 14A disallowance cannot exceed exempt income amount when no expenses incurred for earning exempt income

Gujarat Sidhee Cement Ltd. Versus Principal Commissioner of Income Tax-1, Rajkot

ITAT Rajkot set aside revision order u/s 263 regarding disallowance u/s 14A. The assessee argued no disallowance could exceed exempt income amount and no ... Revision u/s 263 - disallowance u/s 14A not made by AO - as per assessee disallowance u/s. 14A cannot exceed the amount of exempt income and also the fact that the appellant has actually not incurred any expenses towards earning exempt income and hence the provisions of Section 14A r.w.r. 8D have no application - HELD THAT:- We observe that various Courts have consistently taken a position that no disallowance can be made u/s 14A in case the assessee has not earned any exempt income. The Hon’ble Supreme Court in the case of State Bank of Patiala [2018 (11) TMI 1565 - SC ORDER] held that where High Court took a view that amount of disallowance under Section 14A could be restricted to amount of exempt income only, SLP filed against said order was to be dismissed. Also in the case of Corrtech Energy (P.) Ltd. [2014 (3) TMI 856 - GUJARAT HIGH COURT] held that where assessee did not make any claim for exemption of any income from payment of tax, disallowance under Section 14A could not be made. Disallowance under Section 14A cannot exceed exempt income earned by assessee; thus where assessee had suo motu disallowed total exempt income under Section 14A, no further disallowance could be made by invoking Section 14A of the Act. See ABCI Infrastructure (P.) Ltd.[2023 (4) TMI 527 - ITAT GUWAHATI] Accordingly, in light of the aforesaid decisions, and the plain language of the Finance Act, 2022, which has held that the amendment shall apply from 01.04.2022, in our view, it cannot be held that while passing the assessment order, the Assessing Officer took a view which is contrary to the law thereby making the order erroneous and prejudicial to the interest of the Revenue. Further, notably, the decision of Williamson Financial Services Ltd. [2022 (7) TMI 451 - ITAT GAUHATI] on which reliance has sought to be placed by the D.R. had not been passed even on the date of passing of assessment order (30.12.2019) and also on the date passing of 263 order (02.02.2022). Further, the view taken by the Assessing Officer finds direct support from the decisions rendered by Hon’ble Supreme Court on this issue and therefore, in our considered view, the assessment order cannot be held to be erroneous and prejudicial to the interest of the Revenue. Accordingly, we direct that the order passed under Section 263 of the Act may be set-aside. Decided in favour of assessee. Issues Involved:- Validity of order passed under Section 263 of the Income Tax Act, 1961Summary:1. The appeal was filed against the order passed by the Principal Commissioner of Income Tax (PCIT) for Assessment Year 2017-18. The grounds of appeal included challenging the validity of the order under Section 263 of the Act, which directed a reassessment focusing on the applicability of Section 14A regarding disallowance of expenses related to exempt income. 2. The PCIT observed that the assessment order was erroneous and prejudicial to the revenue's interest as it did not make the required disallowance under Section 14A. The PCIT calculated the disallowance amount under Rule 8D r.w.s. 14A and directed a reassessment to include this disallowance.3. The assessee contended that the disallowance under Section 14A cannot exceed the exempt income earned, citing legal precedents including the decision of the Hon'ble Supreme Court. The assessee argued that the PCIT's reliance on CBDT Circular No. 5/2014 was misplaced, as various courts had rejected such interpretation.4. The Departmental Representative (DR) argued for the retrospective application of the Explanation inserted by the Finance Act, 2022 to Section 14A, emphasizing its clarificatory nature. The DR asserted that the assessment order was erroneous based on this amendment.5. The Tribunal noted various court decisions supporting the assessee's position that no disallowance can be made under Section 14A if no exempt income is earned. The Tribunal also highlighted the Delhi High Court's view on the non-retrospective effect of the Finance Act, 2022 amendment to Section 14A.6. Considering the legal precedents and the timing of relevant decisions, the Tribunal held that the assessment order was not erroneous or prejudicial to the revenue's interest. The Tribunal directed the setting aside of the order passed under Section 263 of the Act, thereby allowing the appeal of the assessee.