Section 14A disallowance barred without exempt income; revision under section 263 was found unjustified.

Where no exempt income was earned in the relevant previous year, section 14A disallowance could not be sustained, and a revision under section 263 based on alleged non-enquiry into that disallowance was unjustified. The ITAT noted that the Explanation inserted below section 14A by the Finance Act, 2022 does not operate retrospectively to permit such disallowance for a year in which no exempt income exists. On that basis, the revisionary direction was reversed.

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Issues: Whether the revisionary order under section 263 of the Income-tax Act, 1961, directing reconsideration of disallowance under section 14A read with Rule 8D, was valid when no exempt income was earned in the relevant previous year.

Analysis: The impugned revision was based on the view that the assessment order was erroneous and prejudicial to the interests of the Revenue for want of inquiry into section 14A disallowance. The Tribunal noted that judicial authorities had already settled that the Explanation inserted below section 14A by the Finance Act, 2022 does not operate retrospectively so as to permit disallowance where no exempt income exists in the relevant year. It further recorded that the case file did not show any exempt income earned by the assessee during the relevant previous year.

Conclusion: The revisionary direction under section 263 was unjustified and was reversed. The assessee succeeded on the issue of section 14A disallowance.

Ratio Decidendi: In the absence of exempt income in the relevant previous year, section 14A disallowance cannot be sustained, and a revision under section 263 premised on such disallowance is not justified.

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