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2024 (6) TMI 983 - AT - Income TaxIssues Involved: 1. Disallowance u/s 14A in the absence of exempt income for A.Y. 2016-17. 2. Retrospective application of the explanation to Section 14A inserted by Finance Act, 2022. Summary: 1. Disallowance u/s 14A in the absence of exempt income for A.Y. 2016-17: The appellant filed a return of income for A.Y. 2016-17, declaring a total income of Rs. 20,94,130/-. The AO observed that the appellant had significant investments in equity shares and incurred finance costs, leading to a disallowance of Rs. 50,81,159/- u/s 14A r.w.r. 8D. The appellant argued that no exempt income was earned in the relevant year, thus Section 14A should not apply. The AO and CIT(A) upheld the disallowance, citing precedents and CBDT Circular No. 5/2014, which states that disallowance applies even if no exempt income is earned. 2. Retrospective application of the explanation to Section 14A inserted by Finance Act, 2022: The CIT(A) relied on the Finance Act, 2022, which amended Section 14A to clarify that disallowance applies even if no exempt income is earned, and applied this amendment retrospectively. The appellant contended that this amendment should not apply retrospectively. The Tribunal referred to several case laws, including the Supreme Court's decision in Commissioner of Income Tax Vs. Reliance Industries Ltd. and Principal Commissioner of Income Tax Vs. GVK Project and Technical Services Ltd., which held that disallowance u/s 14A is impermissible in the absence of exempt income. Tribunal's Findings: - The Tribunal concluded that the AO's disallowance was based on presumptions and not legally sustainable. - The retrospective application of the amendment to Section 14A by the Finance Act, 2022, was not permissible, as held by the Delhi High Court in Principal Commissioner of Income Tax (Central)-2 Vs. M/s. Era Infrastructure (India) Ltd. - The Tribunal decided both questions against the revenue and in favor of the assessee, deleting the disallowance made by the AO. Conclusion: The appeal filed by the assessee was allowed, and the disallowance u/s 14A was deleted. The order was pronounced in the open court on 18.06.2024.
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