2023 (1) TMI 953 - AT - Income Tax

Disallowance u/s 14A - Expenditure incurred on earning exempt income earned in the year - HELD THAT - As respectfully following the decision of M/s. Redington India Ltd. 017 (1) TMI 318 - MADRAS HIGH COURT we are of the considered view that disallowance of expenditure u/s. 14A of the Act cannot exceed exempt income and thus, we are inclined to uphold the findings of the Ld. CIT(A) and dismiss the appeal filed by the Revenue.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act, 1961
- Applicability of the explanation to section 14A inserted by the Finance Act, 2022
- Restriction of disallowance to the extent of exempt income

Analysis:
1. Disallowance under section 14A of the Income Tax Act, 1961:
The appeal filed by the Revenue challenged the order passed by the Commissioner of Income Tax (Appeals) related to the assessment year 2011-12. The Revenue contended that the disallowance under section 14A should not be restricted to the extent of dividend income declared by the assessee. The Revenue argued that the assessee had borrowed funds, incurred administrative expenditures, and made fresh investments, which should be considered in computing the disallowance under section 14A.

2. Applicability of the explanation to section 14A inserted by the Finance Act, 2022:
The Revenue relied on the explanation to section 14A inserted by the Finance Act, 2022, claiming that it should be applied retrospectively. However, the assessee argued that the said explanation should be considered prospective and not applicable to the assessment year in question. The Tribunal considered these arguments and examined the retrospective or prospective nature of the explanation to section 14A.

3. Restriction of disallowance to the extent of exempt income:
The key issue revolved around whether the disallowance under section 14A should exceed the exempt income earned by the assessee in the relevant assessment year. The Tribunal referred to various judicial decisions, including the judgment of the Madras High Court in a similar case, to establish that the disallowance under section 14A cannot surpass the exempt income earned. The Tribunal also cited the decision of the Supreme Court and the Delhi High Court to support this position.

4. Conclusion:
After thorough deliberation and considering the arguments presented by both parties, the Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) to restrict the disallowance under section 14A to the extent of exempt income earned by the assessee. The Tribunal rejected the Revenue's contention regarding the retrospective application of the explanation to section 14A. Therefore, the appeal filed by the Revenue was dismissed, and the order was pronounced on 7th December 2022 at Chennai.