Applicability of s.14A disallowance where no exempt income earned despite 2022 Explanation - tribunal disallows addition; assessee wins

Whether s.14A disallowance applies where no exempt income was earned, in light of the Explanation inserted by Finance Act, 2022 w.e.f. 01.04.2022: relying on the SC precedent that pre-amendment no s.14A disallowance can be made absent exempt income, and on a Gauhati HC ruling that the 2022 Explanation is prospective and does not apply to assessment years before 01.04.2022, the tribunal held that the impugned addition under s.14A (r/w Rule 8D(2)(ii)) could not be sustained for a year with no exempt income; held for the assessee.

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Issues: Whether the deletion by the First Appellate Authority of the disallowance computed under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 (amounting to Rs. 17,93,76,718/-) was correct where no exempt income was earned by the assessee in the relevant assessment year.

Analysis: The issue was considered on the facts that no exempt income was earned by the assessee in the relevant assessment year and the Assessing Officer applied the computation under the departmental rule to make a disallowance. The appellate forum examined applicable law including the effect of the Explanation inserted to the provision by the Finance Act, 2022 and relevant High Court authority holding that the Explanation has prospective effect and cannot be applied to assessment years prior to 01.04.2022. The Tribunal also relied on a coordinate-bench decision in the assessee's own case where identical facts and legal questions were decided in the assessee's favour, and followed the binding view of the jurisdictional High Court that no disallowance under the provision can be made when no exempt income is earned in the year for assessment years prior to the prospective amendment.

Conclusion: The deletion of the disallowance under the provision read with the rule is correct and in favour of the assessee; the ground raised by the Revenue is dismissed.

Final Conclusion: Following the jurisdictional High Court's ruling on the prospective operation of the statutory amendment and the coordinate-bench decision, the Revenue's appeal is dismissed and the appellate order deleting the disallowance is upheld.

Ratio Decidendi: Where no exempt income is earned in the relevant assessment year, no disallowance under the provision can be made for assessment years prior to the date from which a statutory Explanation permitting such disallowance operates, and a prospective amendment cannot be applied retrospectively.

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