Facts of the Case

The present appeal was filed by the Revenue against the order dated 05.09.2022 passed by the Income Tax Appellate Tribunal concerning Assessment Year 2015–16.

The Tribunal had deleted the disallowance of ₹3,81,71,231/- made under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

The Revenue contended that the assessee had made substantial investments amounting to approximately ₹45.80 crores and, therefore, expenses must have been incurred in relation to such investments. However, it was an undisputed fact that no exempt income was earned by the assessee during the relevant assessment year.

Issues Involved

  1. Whether disallowance under Section 14A read with Rule 8D can be made when no exempt income has been earned during the relevant assessment year?
  2. Whether the amendment brought by the Finance Act, 2022 has retrospective applicability?

Petitioner’s Arguments (Revenue)

  • The Revenue argued that since the assessee had made substantial investments, it was reasonable to presume that expenses were incurred in managing such investments.
  • It was further contended that the applicability of Rule 8D has been clarified by the Finance Act, 2022, suggesting that disallowance should still apply.

Respondent’s Arguments (Assessee)

  • The assessee’s position, as reflected from the record, was that no exempt income was earned during the relevant assessment year, and therefore, Section 14A could not be invoked.
  • The assessee relied on settled judicial precedents holding that disallowance cannot be made in absence of exempt income.

Court’s Findings / Order

  • The issue of disallowance under Section 14A in absence of exempt income is no longer res integra and is covered by binding precedents.
  • Reliance was placed on earlier decisions including:
    • Cheminvest Limited v. Commissioner of Income Tax-VI
    • Commissioner of Income-tax v. Chettinad Logistics (P.) Ltd.
    • Principal Commissioner of Income Tax v. IL & FS Energy Development Co. Ltd.
  • The Court also noted that the Special Leave Petition (SLP) against Cheminvest Limited was dismissed by the Supreme Court.
  • On the issue of retrospective applicability of the Finance Act, 2022, the Court relied on PCIT v. Era Infrastructure (India) Ltd. and held that it does not apply retrospectively.
  • Consequently, the Court held that no substantial question of law arises, and the appeal was dismissed.

Important Clarification

  • Section 14A cannot be invoked where no exempt income is earned during the relevant assessment year.
  • Amendments introduced by the Finance Act, 2022 do not have retrospective effect for earlier assessment years.

Sections Involved

  • Section 14A, Income Tax Act, 1961
  • Rule 8D, Income Tax Rules, 1962
  • Finance Act, 2022 (interpretational issue on retrospectivity)

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS13102023ITA5582023_160113.pdf

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