2024 (2) TMI 337 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - AO while calculating the disallowance has taken the average value of all the investments including those investments which did not yield any tax exempt dividend income - HELD THAT - As observed that earlier as per decisions of the various High Courts of the country, the proposition was laid down that where the assessee has not derived any tax exempt income from investments, then no disallowance is attracted u/s 14A of the Act. Disallowance of administration expenditure u/s 14A of the Act r.w.r 8D(2)(iii) of the Income Tax Rules, 1962, the Hon ble Delhi High Court in the case of Joint Investments Private Ltd. vs. CIT 2022 (7) TMI 1093 - DELHI HIGH COURT and further in the case of ACB India Limited 2015 (4) TMI 224 - DELHI HIGH COURT has held that for computing the disallowance u/s 14A of the Act r.w.r. 8D(2)(iii) of the Income Tax Rules, 1962, the average value of only the investments yielding non-taxable income have to be considered and not the entire investment. An Amendment has been brought to section 14A of the Act by Finance Act 2022, whereby, an Explanation to section 14A has been inserted, wherein, it has been clarified that notwithstanding anything to the contrary contained in the Act, the provisions to section 14A of the Act shall apply and shall be deemed to have always applied for the purpose of making disallowance in respect of expenditure incurred in relation to earning of tax exempt income irrespective of the fact that any tax exempt income has not actually accrued or received during the relevant year. A/R, has relied upon the recent decision in the case of PCIT Vs. Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT wherein, it has been held that the aforesaid explanation inserted to Section 14A of the Act is applicable prospectively. Assessing Officer is accordingly directed to consider only the investments yielding tax exempt income for computation of disallowance under Rule 8D(2)(iii) of the Income Tax Rules 1962. Appeal of the assessee stands partly allowed.

Summary

Issues:
The appeal involves the disallowance of expenses under section 14A of the Income Tax Act, calculation of disallowance under Rule 8D, applicability of amendments brought by the Finance Act 2022, and retrospective or prospective application of the Explanation to section 14A.

Disallowance under Section 14A and Rule 8D:
The appeal concerns the disallowance of Rs. 68,65,917 made by the Assessing Officer under section 14A read with Rule 8D, which was over and above the suo-moto disallowance of Rs. 9,39,667 by the assessee. The issue raised was that the disallowance should have been restricted to Rs. 26,63,953, calculated based on investments yielding dividend income during the relevant year. The argument was supported by the decision of the Hon'ble Delhi High Court in a specific case. The contention was that only investments yielding tax-exempt income should be considered for the disallowance calculation.

Applicability of Amendments:
The debate centered around the applicability of the amendment introduced by the Finance Act 2022 regarding disallowance under section 14A read with Rule 8D. The assessee argued that the amendment should be applied prospectively from Assessment Year 2022-23. Conversely, the Departmental Representative contended that the newly inserted Explanation to section 14A was clarificatory and retrospectively applicable. Reference was made to a decision of the Guwahati Bench of the Tribunal to support this argument.

Judicial Interpretation and Decision:
The Tribunal considered various High Court decisions on disallowance under section 14A where no tax-exempt income was derived from investments. Notably, the Hon'ble Delhi High Court emphasized that only investments yielding non-taxable income should be considered for disallowance calculation. The Tribunal also discussed the newly inserted Explanation to section 14A, clarifying that it applies retrospectively. However, the assessee relied on a recent Delhi High Court decision stating that the Explanation should be applied prospectively. Following the principle of judicial hierarchy, the Tribunal ruled in favor of the assessee, directing the Assessing Officer to consider only investments yielding tax-exempt income for disallowance calculation under Rule 8D(2)(iii) of the Income Tax Rules 1962.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the computation of disallowance under Rule 8D based on investments generating tax-exempt income. The decision was made in accordance with the recent Delhi High Court ruling, considering the absence of specific jurisdictional or Supreme Court decisions on the matter.