2024 (5) TMI 1540 - AT - Income Tax

Disallowance u/s 14A - As argued assessee has not earned any exempt income - CIT(A) following the decision of Ballarpur Industries Ltd. 2016 (10) TMI 1039 - BOMBAY HIGH COURT held that in the absence of any exempt income no disallowance u/s.14A can be made - HELD THAT - Here in this case it is not in dispute that assessee has not earned any exempt income and yet it has offered suomoto disallowance. AO has made additional disallowance mostly on account of interest despite assessee stating that no borrowed funds have been utilized for the purpose of strategic investments. The core contention which has been raised that now in light of amendment by the Finance Act 2022 to Section 14A in the statute w.e.f. 01/04/2022 will the newly inserted Explanation will apply prospectively or retrospectively. We find that this precise issue has been considered of M/s. Era Infrastructure Ltd wherein after analyzing the amendment brought by the Finance Act 2022 in Section 14A by inserting a non-obstante clause and Explanation was inserted with effect from 01/04/2022. As insertion of Explanation w.e.f. 01/04/2022 will not apply retrospective therefore the decision of the Tribunal saying it retrospective cannot be followed. Accordingly the order of the ld. CIT (A) is deleted and Revenue s appeal is dismissed.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. Whether the deletion of the addition made under Section 14A of the Income Tax Act by the CIT(A) was justified, given that the assessee had not earned any exempt income during the assessment year in question.

2. Whether the amendment made by the Finance Act, 2022, which inserted an Explanation to Section 14A, applies retrospectively to assessment years prior to 2022-23.

ISSUE-WISE DETAILED ANALYSIS

1. Justification of Deletion of Addition under Section 14A

Relevant legal framework and precedents: Section 14A of the Income Tax Act deals with the disallowance of expenditure incurred in relation to income that does not form part of the total income. The CBDT Circular No. 5/2014 clarified that Section 14A applies even if no exempt income is earned in a particular assessment year. The jurisdictional High Court in PCIT vs. Ballarpur Industries Ltd. held that no disallowance under Section 14A can be made in the absence of exempt income.

Court's interpretation and reasoning: The Tribunal considered the fact that the assessee had not earned any exempt income during the relevant assessment year. The Tribunal upheld the CIT(A)'s decision, which relied on the jurisdictional High Court's ruling that disallowance under Section 14A is not applicable without exempt income.

Key evidence and findings: The assessee had made a suomoto disallowance of Rs.10,04,112/- in its return of income, acknowledging some expenses related to its investments. However, the AO made an additional disallowance of Rs.10,68,25,648/-, primarily for interest, despite the assessee's claim of not using borrowed funds for strategic investments.

Application of law to facts: The Tribunal applied the principle from the jurisdictional High Court's decision, which is binding, to conclude that no disallowance is warranted under Section 14A in the absence of exempt income.

Treatment of competing arguments: The Tribunal dismissed the Revenue's reliance on the CBDT Circular No. 5/2014 and other ITAT decisions, emphasizing the jurisdictional High Court's precedence and the principle that Section 14A does not apply without exempt income.

Conclusions: The Tribunal concluded that the CIT(A) was justified in deleting the additional disallowance under Section 14A, as no exempt income was earned by the assessee during the assessment year.

2. Retrospective Application of the Amendment to Section 14A

Relevant legal framework and precedents: The Finance Act, 2022, inserted an Explanation to Section 14A, purportedly clarifying its application. The Delhi High Court in M/s. Era Infrastructure Ltd. held that this amendment is not retrospective.

Court's interpretation and reasoning: The Tribunal examined the Delhi High Court's judgment, which clarified that the amendment to Section 14A is not retrospective, as it changes the law as it previously stood.

Key evidence and findings: The Tribunal noted that the amendment was effective from 01/04/2022 and the Delhi High Court's interpretation that it does not apply to prior assessment years.

Application of law to facts: The Tribunal applied the Delhi High Court's interpretation to determine that the Explanation inserted by the Finance Act, 2022, does not apply to the assessment year in question (2014-15).

Treatment of competing arguments: The Tribunal rejected the Revenue's argument that the amendment is clarificatory and retrospective, citing the Delhi High Court's ruling.

Conclusions: The Tribunal concluded that the amendment to Section 14A does not apply retrospectively, and therefore, the CIT(A)'s decision to not apply the amendment to the assessment year in question was correct.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "In view of the above position of law, we are of the considered opinion that where there is no dispute of fact that no dividend income was earned by the assessee during the year, no disallowance is called for under section 14 A of the Act."

Core principles established: The Tribunal reaffirmed the principle that Section 14A disallowance is not applicable in the absence of exempt income. It also established that the amendment to Section 14A by the Finance Act, 2022, is not retrospective.

Final determinations on each issue: The Tribunal upheld the CIT(A)'s decision to delete the additional disallowance under Section 14A and confirmed that the amendment to Section 14A does not apply to the assessment year in question.

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