Disallowance u/s 14A of Income Tax Act not available in respect of Investments not yielding Tax-Free Income: ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) has held that disallowance under section 14 A of the Income Tax Act, 1961 is not available in respect of investments not yielding tax-free income.

Paranjapee Schemes Construction Ltd, the assessee/appellant had made suo-moto disallowance to the tune of Rs. 53,79,526 in respect of expenses incurred on exempt income. The assessing officer ( AO ) proposed to disallow Rs. 4,08,32,574 by applying section 14A r.w. rule 8D of the Act. The AO took into consideration the total non-current investments of the assessee of Rs. 306,04,37,241 and calculated the disallowance under section 14A r.w.rule 8D at the rate of 1% at Rs. 3,06,04,372. After reducing the disallowance made by the assessee, a balance amount of Rs. 2,52,24,846/- was added on account of disallowance under section 14A and rule 8D.

On appeal before the CIT(A), the assessee contended that the AO cannot invoke rule 8D without recording any satisfaction about the assessee's claim that no expenditure is relatable to earning of exempt income apart from the suo-moto disallowance offered by the assessee in its return of income. Even otherwise only those investments which have yielded exempt income can be considered for making disallowance and lastly, in the absence of exempt income, disallowance of expenditure is not permissible. It was further submitted that the amendments in provisions of section 14A introduced vide Finance Act 2022 w.e.f. 01.04.2022 cannot be presumed to have a retrospective effect.

The CIT(A) held that the disallowance made by the AO over and above the suo-moto disallowance is not justified. As per Section 14A, the expenditure incurred by a taxpayer in relation to income that is not included in the total income as per the provisions of the Act should not be considered as a deduction while computing the total income of the taxpayer.

The appellant's contented is that it has not earned any exempt income during the year from investments in equity and debenture instruments and hence no disallowance of expenditure is permitted.

The two-member bench of Amit Shukla (Judicial Member) and Renu Jauhri (Accountant Member) has observed that no disallowance under section 14A of the Income Tax Act is warranted in respect of investments not yielding tax-free income for the appellant.

The ITAT upheld the decision of the CIT(A) and held that based on suo-moto disallowance at Rs. 53,79,626 has been rightly calculated by the Assessee.

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