2024 (10) TMI 1207 - HC - Income Tax

Court Affirms No Section 14A Disallowance Without Exempt Income; Finance Act 2022 Explanation Not Retroactive.

The Pr. Commissioner of Income Tax -Central -1 Versus Sahara India Financial Corporation Ltd.

The High Court dismissed the Revenue's appeal, affirming the ITAT's decision that disallowance under Section 14A of the Income Tax Act is inapplicable ... Disallowance u/s 14A - if no exempt income is earned by the Assessee - HELD THAT:- Clearly, there could be no disallowance of any expenditure u/s 14A of the Act if the assessee’s income for the relevant assessment year did not include any income that was exempt from the limited tax. This issue is covered by the decision of this Court in Cheminvest Limited [2015 (9) TMI 238 - DELHI HIGH COURT] as well as the recent decision in Alchemist Ltd. [2024 (8) TMI 1371 - DELHI HIGH COURT] Concededly, the said explanation is applicable prospectively and thus, would be inapplicable to the assessment year in question (AY 2016-17). It is relevant to note that this Court had in Era Infrastucture (India) Ltd. [2022 (7) TMI 1093 - DELHI HIGH COURT] held that the explanation would be applicable only prospectively and would have no retrospective operation. In the given facts of this case, where the assessee does not have any exempt income in the relevant assessment year, there is no allegation that any expenditure has been incurred on account of exempt income that would accrue or arise in future years. Thus, even if we accept – which we do not – that the explanation to Section 14A of the Act as introduced by the Finance Act, 2022 was applicable retrospectively, the same would have no application in the given facts. Decided in favour of assessee. Issues:1. Appeal against order of ITAT regarding disallowance of expenditure under Section 14A of the Income Tax Act, 1961 for AY 2016-17.Detailed Analysis:The Revenue filed an appeal against the order of the Income Tax Appellate Tribunal (ITAT) regarding the disallowance of expenditure under Section 14A of the Income Tax Act, 1961 for the assessment year (AY) 2016-17. The assessee initially declared a loss of Rs. 15,36,80,671/-, which was later revised to Rs. 10,61,62,881/-. The Assessing Officer (AO) assessed the total income at Rs. 92,07,100/-, including an addition of Rs. 6,13,17,433/- on account of disallowance of expenditure under Section 14A of the Act. The AO disallowed a part of the expenditure based on the assumption that investments were made for yielding tax-free income. However, the assessee contended that no income was exempt from tax, hence no disallowance should apply.The CIT(A) deleted the addition of Rs. 6,13,17,433/-, ruling in favor of the assessee. The Revenue appealed to the ITAT, which upheld the CIT(A)'s decision. The Revenue then approached the High Court, raising questions on the correctness of the ITAT's decision and the deletion of the disallowance under Section 14A of the Act. The High Court noted that if the assessee's income did not include any exempt income, no disallowance under Section 14A should be made, citing relevant case laws.The High Court also considered the explanation to Section 14A inserted by the Finance Act, 2022, clarifying that it applies prospectively. Referring to a previous judgment, the High Court held that the explanation has no retrospective operation. Even if the explanation were to apply retrospectively, it would not be relevant in this case where no exempt income was present. Consequently, the High Court found no substantial question of law for consideration and dismissed the appeal.In conclusion, the High Court upheld the decisions of the lower authorities, emphasizing that disallowance under Section 14A does not apply when no income is exempt from tax. The High Court's dismissal of the appeal signifies that no legal issues warrant further examination, and pending applications were disposed of accordingly.