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2022 (7) TMI 1450 - AT - Income TaxAddition u/s 14A - disallowing expenses i.e., interest expenses u/r 8D(2)(ii) and administrative expenses being 0.5% of average value of investment u/r 8D(2)(iii) - assessee stated that the assessee has not earned any exempt income and has not claimed any income in its computation of income - HELD THAT - As going through the decision of Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT we are of the view that the explanation inserted in the provisions of section 14A of the Act by the Finance Act, 2022 is prospective and not retrospective. Accordingly, since the assessee has not earned any exempt income, no disallowance can be resorted by invoking the provisions of section 14A of the Act read with Rule 8D(2) of the Rules. The appeal of the assessee is allowed.
Issues Involved
1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961. Issue-wise Detailed Analysis Disallowance under Section 14A - Rs. 35,56,906/- The primary issue in this appeal is the disallowance of expenses amounting to Rs. 35,56,906/- under Section 14A of the Income Tax Act, 1961. This includes interest expenses under Rule 8D(2)(ii) amounting to Rs. 32,06,464/- and administrative expenses being 0.5% of the average value of investment under Rule 8D(2)(iii) amounting to Rs. 3,50,442/-. The assessee argued that no dividend income was earned during the relevant previous year, thus disallowance under Section 14A does not arise. The assessee relied on the decision of the Madras High Court in the case of M/s. Chettinad Logistics Private Limited vs. Commissioner of Income Tax, which held that disallowance under Section 14A does not apply if no exempt income is earned. This position was corroborated by the Supreme Court's dismissal of the Special Leave Petition in the same case. The CIT(A) confirmed the disallowance by referring to the Supreme Court's judgment in Maxopp Investments Ltd. vs. CIT, stating that the absence of tax-exempt income does not provide relief from disallowance under Section 14A. The CIT(A) further stated that it is absurd to allow expenditure in one year due to the absence of tax-exempt income and disallow it in another year due to the presence of such income. The Tribunal, however, found that the issue is covered by the decision of the Jurisdictional High Court in CIT v. Chettinad Logistics (P) Ltd., which held that disallowance under Section 14A read with Rule 8D cannot be invoked if no exempt income is earned during the relevant financial year. The Tribunal also noted that this decision has been affirmed by the Supreme Court. The Department's argument, based on the Finance Act, 2022, which introduced an explanation to Section 14A stating that the disallowance applies even if no exempt income is earned, was considered. However, the Tribunal referred to the Delhi High Court's decision in PCIT vs. Era Infrastructure (India) Ltd., which held that the amendment to Section 14A is prospective and not retrospective. Conclusion After considering the rival contentions and the relevant judicial precedents, the Tribunal concluded that the explanation inserted in Section 14A by the Finance Act, 2022, is prospective. Since the assessee did not earn any exempt income during the relevant financial year, no disallowance under Section 14A read with Rule 8D can be made. Consequently, the appeal filed by the assessee was allowed. Final Judgment The appeal filed by the assessee is allowed, and the disallowance of Rs. 35,56,906/- under Section 14A is set aside. The order was pronounced in the open court on 22nd July, 2022, at Chennai.
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