Section 14A disallowance not sustainable without exempt income; prospective amendment applied from 01.04.2022

Section 14A disallowance cannot be sustained where no exempt income was earned during the relevant year, because the disallowance mechanism under rule 8D applies only in relation to exempt income. The Tribunal followed the Delhi High Court in Era Infrastructure (India) Ltd. and held that the amendment making such disallowance mandatory from 01.04.2022 operates prospectively. The disallowance was directed to be deleted.

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Issues: Whether disallowance under section 14A could be made when no exempt income was earned during the relevant year.

Analysis: The assessee had not earned any exempt income for the year under consideration. The disallowance had been computed by applying rule 8D. Relying on the decision of the Delhi High Court in Era Infrastructure (India) Ltd., the Tribunal accepted that section 14A disallowance is not warranted in the absence of exempt income, and that the amendment making such disallowance mandatory from 01.04.2022 operates prospectively.

Conclusion: The disallowance under section 14A was held to be unsustainable and was directed to be deleted. The appeal was allowed.

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