Facts of the Case

The present appeal was filed by the Revenue challenging the order dated 29.09.2021 passed by the Income Tax Appellate Tribunal for Assessment Year 2010–11.

The core issue arose from the Tribunal’s decision wherein it held that no disallowance under Section 14A of the Income Tax Act, 1961 could be made where the assessee had not earned any exempt income during the relevant assessment year.

The Revenue preferred an appeal before the Delhi High Court contesting this finding.

Issues Involved

  1. Whether disallowance under Section 14A can be made in absence of exempt income?
  2. Whether the amendment introduced via Finance Act, 2022 to Section 14A has retrospective applicability?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that disallowance under Section 14A should be applicable irrespective of whether exempt income was earned.
  • Reliance was placed on the amendment brought by the Finance Act, 2022, suggesting that the legislative intent supports disallowance even in absence of exempt income. 

Respondent’s Arguments (Assessee)

  • The assessee argued that Section 14A cannot be invoked when no exempt income is earned during the relevant assessment year.
  • It relied on settled judicial precedents supporting the proposition that disallowance requires actual exempt income.

Court’s Findings / Order

  • The Delhi High Court noted that the issue is already settled by its coordinate bench in:
    • PCIT (Central)-2 vs Era Infrastructure (India) Ltd.
  • The Court held that:
    • The amendment to Section 14A by the Finance Act, 2022 is prospective in nature and not retrospective.
    • In absence of exempt income, no disallowance under Section 14A can be made.
  • Since no substantial question of law arose, the appeal filed by the Revenue was dismissed.

Important Clarification by Court

  • The Court clarified that the outcome of pending SLP in PCIT vs IL & FS Energy Development Company Ltd. may impact the position in future.
  • Parties would be bound by the Supreme Court’s decision if the Revenue succeeds in the pending SLP.

Sections Involved

  • Section 14A of the Income Tax Act, 1961
  • Finance Act, 2022 (Amendment to Section 14A)


Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS05122022ITA5052022_184933.pdf

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