2024 (11) TMI 1191 - AT - Income Tax

Disallowance under Section 14A invalid when no exempt income earned during assessment years

Incred Holdings Limited Versus Assistant Commissioner of Income-tax, Circle 6 (3) (2), Mumbai And Incred Holdings Limited Versus Assistant Commissioner of Income-tax, Circle 6 (3) (2), Mumbai And (Vice-Versa)

ITAT Mumbai ruled in favor of the assessee regarding disallowance under Section 14A read with Rule 8D. The tribunal held that where no exempt income was ... Disallowance of expenditure u/s 14A r.w.r. 8D - as argued assessee has not earned any exempt income during the captioned assessment years - basis for the impugned disallowance by the AO is the amendment brought in the Act which according to the AO was effective from the AYs under consideration whereas the contention of the assessee is that the amendment is prospective and is effective from 01/04/2022 - HELD THAT:- After finding that the assessee has not earned any exempt income during the captioned AYs, we are of the considered view that the issue is no more res integra in light of plethora of judgments of the various Hon’ble High Courts. The Hon’ble High Court of Delhi in the case of PCIT vs. McDonald’s India (P) Ltd. [2018 (11) TMI 1057 - DELHI HIGH COURT] had the occasion to consider a similar issue and decided in favour of the assessee and against the revenue. Contention of the revenue that post amendment, brought by Finance Act, 2022, the provisions of Section 14A has been amended and disallowance can be made even if there is no exempt income - The Hon’ble High Court of Delhi in the case of PCIT vs. Era Infrastructure (India) Ltd [2022 (7) TMI 1093 - DELHI HIGH COURT] has held that “Amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 1-4-2022 and cannot be presumed to have retrospective effects”. Moreover, within the memorandum explaining the provision of Finance Bill, 2022, it has been categorically mentioned that “This amendment will take effect from 01/04/2022”. Accordingly, appeals of the assessee are allowed. Addition on account of ESOP expenses - CIT(A) deleted the additions - HELD THAT:- Since the decision of the Special Bench of the ITAT Bangalore in Biocon Ltd [2013 (8) TMI 629 - ITAT BANGALORE] has been affirmed by the Hon’ble Karnataka Hight Court [2020 (11) TMI 779 - KARNATAKA HIGH COURT] which has been rightly followed by the ld. CIT(A), we do not find any reason to interfere with the findings of the ld. CIT(A). Accordingly, the captioned appeals by the revenue are dismissed. Issues Involved:1. Disallowance of expenditure under Section 14A read with Rule 8D in the absence of exempt income.2. Deletion of addition on account of Employee Stock Option Plan (ESOP) expenses.Issue-wise Detailed Analysis:1. Disallowance of Expenditure under Section 14A Read with Rule 8D:The primary issue in the appeals by the assessee was the disallowance of expenditure under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the relevant assessment years (AYs 2013-14 to 2018-19). The assessee contended that the amendment to the Act, which the Assessing Officer (AO) relied upon, was prospective and effective from 01/04/2022, thus not applicable to the assessment years in question. The tribunal referred to multiple judgments from various High Courts, including the Delhi High Court in PCIT vs. McDonald's India (P) Ltd., which established that if no exempt income is earned, no disallowance under Section 14A can be made. The tribunal also cited the Madras High Court in Commissioner of Income-tax v. Chettinad Logistics (P.) Ltd., which reinforced that Rule 8D cannot extend beyond the scope of Section 14A. Furthermore, the Bombay High Court in PCIT vs. Kohinoor Project (P.) Ltd. supported the view that no disallowance is permissible in the absence of exempt income. The tribunal concluded that the amendment by the Finance Act, 2022, was not retrospective, thereby directing the AO to delete the disallowance for the relevant years. Consequently, the appeals by the assessee were allowed.2. Deletion of Addition on Account of ESOP Expenses:The appeals by the revenue concerned the deletion of additions related to ESOP expenses. The AO had added ESOP expenses based on the fact that the issue was sub judice before the High Court, following directions from the JCIT under Section 144A. The assessee explained that the ESOP plan was an equity incentive plan launched by a group entity to motivate employees. The assessee relied on several judicial pronouncements, including DCIT vs. Accenture Services Pvt. Ltd. and Biocon Ltd. vs. DCIT, which supported the allowance of ESOP expenses. The CIT(A) deleted the additions, following the decision of the Karnataka High Court, which affirmed the Special Bench of ITAT Bangalore's decision in Biocon Ltd. The tribunal found no reason to interfere with the CIT(A)'s findings, as the decision of the Special Bench had been affirmed by the Karnataka High Court. Therefore, the appeals by the revenue were dismissed.In conclusion, the tribunal allowed the appeals filed by the assessee and dismissed the appeals filed by the revenue, pronouncing the order on 17th October, 2024, at Mumbai.