2024 (11) TMI 1317 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - assessee contended that the assessee has not earned any exempt income and has also not incurred any expenditure as there was no such exempt income for the year under consideration - HELD THAT - As observed that the assessee has not earned any exempt income during the impugned year and it is now a settled preposition of law that disallowance u/s. 14A cannot be made when the assessee has not earned any exempt income during the year under consideration. It is also pertinent to point out that the amendment brought about in Section 14A introduced vide Finance Act, 2022 w.e.f. 01.04.2022 is prospective in nature which provides that disallowance u/s. 14A is to be made even when the assessee has not earned any exempt income and the same has been reiterated by the decision of Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT which has been followed in various other subsequent decisions. Appeal filed by the assessee is allowed.

Summary

Issues:
Challenge to addition under section 14A of the Income-tax Act, 1961 without exempt income or expenditure incurred. Interpretation of the prospective nature of the amendment to Section 14A introduced by the Finance Act, 2022.

Analysis:
The judgment deals with an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the addition of a sum under section 14A of the Income-tax Act, 1961 for the Assessment Year 2021-22. The assessee challenged the addition of INR 215,773 under section 14A without having earned any exempt income or incurred related expenditure during the year. The Appellate Tribunal noted that the amendment to Section 14A introduced by the Finance Act, 2022, is prospective in nature and applicable for the assessment year commencing on or after 1 April 2022.

The assessee, a private limited company, had filed its return of income declaring Nil income, which was selected for scrutiny. The Assessing Officer passed an assessment order making additions under section 14A and on account of ESOP expenses. The Commissioner of Income Tax (Appeals) partly upheld the order and confirmed the disallowance under section 14A. The assessee then appealed before the Appellate Tribunal challenging the Commissioner's order.

During the proceedings, the Authorized Representative for the assessee argued that no exempt income was earned, and no related expenditure was incurred, emphasizing the prospective nature of the amendment to Section 14A. The Departmental Representative, however, contended that disallowance under section 14A is warranted even without earning exempt income, citing circular no. 5/2014.

After considering the submissions and relevant legal precedents, the Appellate Tribunal observed that disallowance under section 14A cannot be made when no exempt income is earned during the year under consideration. It also highlighted that the amendment to Section 14A, effective from 1 April 2022, mandates disallowance even in the absence of exempt income. Citing judicial decisions, the Tribunal concluded that the impugned addition should be deleted, allowing the grounds raised by the assessee.

In conclusion, the appeal filed by the assessee was allowed, and the impugned addition under section 14A was directed to be deleted. The judgment was pronounced in open court on 27.11.2024.