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

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 earned during the assessment years, no disallowance could be made, following Delhi HC precedents. The tribunal clarified that Finance Act 2022 amendments to Section 14A are prospective from April 1, 2022, not retrospective. Additionally, ITAT dismissed revenue's appeal on ESOP expenses, upholding CIT(A)'s deletion of additions based on established precedents from Karnataka HC and ITAT Bangalore Special Bench.

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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.

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