2025 (1) TMI 499 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - when no exempt income is earned by assessee company - scope of explanation brought in by the Finance Act, effective from 1.4.2022, regarding disallowance u/s 14A - HELD THAT - We note that in this case assessee has not earned any exempt income and it is a well settled proposition that when any exempt income has not been earned, disallowance cannot be made. As regards the explanation, which the Ld. CIT(A) has held to be retrospective, we note that in the case of PCIT vs. Sahara India Financial Corporation Ltd. 2024 (10) TMI 1207 - DELHI HIGH COURT has held that no disallowance of any expenditure u/s. 14A could be done, when the assessee has not earned any exempt income, and that this explanation is applicable prospectively. Hence, this explanation is not applicable to the present assessment years 2015-16 2016-17. Thus, respectfully following the precedent, as aforesaid, we set aside the order of the Ld. CIT(A) and decide the issue in favour of the assessee.

2024 (10) TMI 1207 - HC

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the disallowance under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, 1962, is justified when no exempt income is earned by the assessee during the assessment years 2015-16 and 2016-17.
Whether the explanation brought in by the Finance Act, effective from 1.4.2022, regarding disallowance under Section 14A, is applicable retrospectively to the assessment years in question.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance under Section 14A when no exempt income is earned

Relevant legal framework and precedents: Section 14A of the Income Tax Act deals with the disallowance of expenditure incurred in relation to income not includable in total income. Rule 8D provides the method for determining the amount of expenditure in relation to such income. The Circular No. 5 of 2014 issued by CBDT was also referenced by the Assessing Officer (AO).
Court's interpretation and reasoning: The court noted that it is a well-settled proposition that disallowance under Section 14A cannot be made if no exempt income is earned by the assessee. The court relied on the precedent set by the Hon'ble Delhi High Court in the case of PCIT vs. Sahara India Financial Corporation Ltd., which held that no disallowance could be made under Section 14A when no exempt income is earned.
Key evidence and findings: The assessee did not earn any exempt income during the assessment years in question. The AO's reliance on the CBDT Circular was found to be inappropriate in the absence of exempt income.
Application of law to facts: The court applied the legal principle that disallowance under Section 14A is not applicable when no exempt income is earned. This interpretation was supported by the Delhi High Court precedent.
Treatment of competing arguments: The AO argued for the applicability of Section 14A based on the incurred interest expenses and the CBDT Circular. However, the court favored the assessee's argument, supported by judicial precedent, that no disallowance is warranted without exempt income.
Conclusions: The court concluded that the disallowance under Section 14A was not justified for the assessment years 2015-16 and 2016-17, as no exempt income was earned by the assessee.

Issue 2: Retrospective application of the explanation introduced by the Finance Act

Relevant legal framework and precedents: The explanation regarding disallowance under Section 14A was introduced by the Finance Act, effective from 1.4.2022. The court considered its applicability to prior assessment years.
Court's interpretation and reasoning: The court noted that the Delhi High Court in PCIT vs. Sahara India Financial Corporation Ltd. held that the explanation is applicable prospectively and not retrospectively.
Key evidence and findings: The court found that the explanation introduced by the Finance Act was not intended to apply to assessment years prior to its effective date.
Application of law to facts: The court applied the principle that legislative amendments are generally prospective unless explicitly stated otherwise. The court found no indication that the explanation was intended to apply retrospectively.
Treatment of competing arguments: The Ld. CIT(A) treated the explanation as retrospective, but the court rejected this view based on the Delhi High Court's interpretation.
Conclusions: The court concluded that the explanation introduced by the Finance Act is not applicable to the assessment years 2015-16 and 2016-17.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "We note that in this case assessee has not earned any exempt income and it is a well settled proposition that when any exempt income has not been earned, disallowance cannot be made."
Core principles established: Disallowance under Section 14A is not applicable in the absence of exempt income. Legislative amendments are generally prospective unless explicitly stated otherwise.
Final determinations on each issue: The court set aside the orders of the Ld. CIT(A) for both assessment years, concluding that the disallowance under Section 14A was not justified, and that the explanation introduced by the Finance Act is not applicable retrospectively.

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