Facts of the Case

The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the order dated 02.01.2024 passed by the Income Tax Appellate Tribunal for Assessment Year 2016-17. The Tribunal had affirmed the order of the Commissioner of Income Tax (Appeals), which deleted a disallowance of ₹6,13,17,433/- made under Section 14A of the Act.

The assessee had filed its return declaring a loss, which was later revised. During scrutiny, the Assessing Officer made various additions, including disallowance under Section 14A on the assumption that the assessee’s investments were capable of yielding exempt income.

 

Issues Involved

  1. Whether disallowance under Section 14A of the Income Tax Act can be made in a year where no exempt income has been earned.
  2. Whether the ITAT was justified in deleting the disallowance made under Section 14A.
  3. Whether the Explanation to Section 14A inserted by the Finance Act, 2022 applies retrospectively.
  4. Whether any substantial question of law arose for consideration under Section 260A.

 

Petitioner’s (Revenue’s) Arguments

  • The provisions of Section 14A are clear and mandate disallowance of expenditure incurred in relation to investments capable of yielding exempt income, even if no exempt income is earned in the relevant year.
  • The ITAT erred in deleting the disallowance of ₹6.13 crore made by the Assessing Officer.
  • The Explanation inserted to Section 14A by the Finance Act, 2022 clarifies the legislative intent and supports the Revenue’s position.

 

Respondent’s (Assessee’s) Arguments

  • No part of the assessee’s income for AY 2016-17 was exempt from tax.
  • In absence of exempt income, Section 14A has no application.
  • The issue is squarely covered by binding precedents of the Delhi High Court.
  • The Explanation to Section 14A introduced by the Finance Act, 2022 is prospective and cannot be applied to earlier assessment years.

 

Court Order / Findings

  • The High Court held that disallowance under Section 14A cannot be made where the assessee has not earned any exempt income during the relevant assessment year.
  • The issue was held to be conclusively covered by the decision in Cheminvest Ltd. v. CIT, as well as subsequent judgments including PCIT v. Alchemist Ltd.
  • The Court rejected the Revenue’s reliance on the Explanation to Section 14A inserted by the Finance Act, 2022, holding that the amendment operates prospectively.
  • Even otherwise, the Explanation had no application on facts, as there was no allegation of expenditure incurred for earning exempt income in future years.

 

Important Clarification

The Court clarified that:

  • The Explanation to Section 14A introduced by the Finance Act, 2022 does not have retrospective effect.
  • For years prior to the amendment, the settled legal position remains that Section 14A disallowance is impermissible in absence of exempt income.

 

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the deletion of disallowance under Section 14A and held that no substantial question of law arose for consideration under Section 260A of the Income Tax Act, 1961.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770115334_THEPR.COMMISSIONEROFINCOMETAXCENTRAL1VsSAHARAINDIAFINANCIALCORPORATIONLTD..pdf  

 

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