Section 14A disallowance not applicable where no exempt income pre 2022; 80G deduction allowed for eligible CSR donations.

For assessment years before the 2022 amendment, disallowance under section 14A (and Rule 8D) cannot be invoked where no exempt income was earned, so the addition was deleted in favour of the assessee. Separately, Explanation 2 to section 37(1) disallowing CSR as business expenditure does not negate a distinct statutory deduction for donations; where the recipient fund/trust qualifies under the charitable-donation provision and is not one of the expressly excluded funds, the section 80G deduction is allowable, and the deduction was allowed in the assessee's favour.

---

---

Issues: (i) Whether disallowance under section 14A (read with Rule 8D) can be made where no exempt income was earned in the assessment year; (ii) Whether deduction under section 80G is permissible for amounts spent pursuant to mandatory CSR obligations when the recipient fund/trust is otherwise eligible for deduction.

Issue (i): Whether disallowance under section 14A read with Rule 8D is sustainable for the assessment year where the assessee did not earn any exempt income.

Analysis: The statutory amendment introducing an Explanation permitting disallowance even in absence of exempt income took effect from 01.04.2022 and is therefore prospective to assessment years beginning on or after that date. Prior authority establishes that where no exempt income was earned in the relevant year, disallowance under the provision could not be invoked. The facts record absence of exempt income for the assessment year under consideration, and the amendment is not applicable to that year.

Conclusion: Disallowance under section 14A read with Rule 8D is not sustainable for the assessment year because no exempt income was earned; decision upholding deletion of the addition is in favour of the assessee.

Issue (ii): Whether deduction under section 80G is allowable for CSR contributions made to a trust/fund eligible under section 80G notwithstanding the restriction in Explanation 2 to section 37(1) denying business expenditure deduction for CSR.

Analysis: Section 80G provides for deduction of donations to specified funds/trusts; Explanation 2 to section 37(1) operates in the context of computing business income and disallows CSR as a business deduction but does not, by its text, nullify separate statutory deductions available under other provisions. The donations in question were not to the specific funds expressly excluded under section 80G(2)(a)(iiihk)/(iiihl). Consistent tribunal determinations recognize distinct treatment of CSR expenditure under the charitable-donation provision where the recipient is eligible.

Conclusion: Deduction under section 80G is allowable for the CSR contribution made to an eligible trust; decision allowing the deduction is in favour of the assessee.

Final Conclusion: Both substantive issues decided in favour of the assessee result in dismissal of the Revenue's appeal and restoration of the appellate authority's order insofar as the two contested additions/deductions are concerned.

Ratio Decidendi: For assessment years prior to the effective date of the 2022 amendment, section 14A (read with Rule 8D) cannot be applied to make a disallowance where no exempt income was earned; separately, Explanation 2 to section 37(1) does not preclude a claim for deduction under section 80G when the donation is made to a fund/trust that qualifies for deduction under section 80G and is not one of the funds expressly excluded by section 80G(2)(a).

---