Facts of the Case

The present appeal was filed by the Revenue challenging the order dated 31 January 2018 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2010–11.

The Assessing Officer had made a disallowance of ₹10,07,34,000/- under Section 14A read with Rule 8D on account of expenditure allegedly incurred in relation to exempt income. However, the assessee contended that no exempt income (such as dividend income) was earned during the relevant assessment year.

The ITAT accepted the assessee’s contention and deleted the disallowance. The Revenue preferred an appeal before the Delhi High Court.

Issues Involved

  1. Whether disallowance under Section 14A of the Income Tax Act, 1961 can be made when no exempt income is earned during the relevant assessment year.
  2. Whether the expression “in relation to” in Section 14A permits disallowance even in absence of actual exempt income.
  3. Whether the ITAT erred in ignoring legislative intent and CBDT Circular No. 5/2014.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting disallowance of interest expenditure under Section 14A.
  • The phrase “in relation to” in Section 14A includes both direct and proximate nexus between expenditure and potential exempt income.
  • Disallowance should apply irrespective of actual earning of exempt income.
  • Reliance was placed on legislative intent and CBDT Circular No. 5/2014 to justify the disallowance.

Respondent’s Arguments (Assessee)

  • The assessee did not earn any exempt income during the relevant year.
  • In absence of exempt income, Section 14A cannot be invoked.
  • The ITAT rightly relied on settled judicial precedents of the Delhi High Court.

Court’s Findings / Order

  • The Court noted that concurrent findings of fact by lower authorities confirmed that no exempt income was earned during the relevant year.
  • The issue is squarely covered by the judgment in Cheminvest Ltd. vs. CIT (2015).
  • It was held that:

Section 14A applies only when there is actual exempt income earned or receivable during the relevant previous year.

  • The Court also relied on:
    Pr. Commissioner of Income Tax (Central)-2 vs. Era Infrastructure (India) Ltd. (2022)
    holding that amendment to Section 14A by Finance Act, 2022 is not retrospective.
  • Final Order:
    • No substantial question of law arises.
    • Appeal of the Revenue dismissed.

Important Clarification

  • Section 14A disallowance cannot be made in absence of exempt income.
  • The phrase “does not form part of total income” requires actual receipt of exempt income, not hypothetical or anticipated income.
  • Amendment by Finance Act, 2022 does not apply retrospectively if it alters existing law.

Sections Involved

  • Section 14A of the Income Tax Act, 1961
  • Rule 8D of Income-tax Rules, 1962

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:4087-DB/MMH06102022ITA3802022_201204.pdf

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