Disallowance under Section 14A, cannot Exceed Exempt Income while Computing Income under Normal Provisions and Book Profit u/s 115JB of Income Tax Act: ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the disallowance under Section 14A of the Income Tax Act 1961, could not exceed income while computing the income under normal provisions and book profit under Section 115JB of the Income Tax Act.

Revenue is against the action of the Ld. CIT(A) deleting the disallowance made by the AO under Section 14A of the Act in accordance with Rule 8D both while computing income under normal provisions and book profit u/s 115JB of the Act.

The assessee, Chalet Hotels held investments in shares of various associate companies, none of which yielded any exempt income during the year. The AO however had applied the provisions of Section 14A of Income Tax Act, read with Rule 8D of Income Tax Rules to make disallowance to the tune. On appeal, the Commissioner of Income Tax Appeals (CIT(A)) relied on the decision of the Bombay High Court in the case of Nirved Traders Pvt. Ltd held that, in absence of exempt income, no disallowance under Section 14A of the Income Tax Act was warranted. The CIT(A) therefore deleted the disallowance made by the AO

It was noted that similar issue had come up for consideration in assessee’s own case for AY 2015-16

Biswanath, on behalf of the revenue cited the Explanation inserted in Section 14A by the Finance Act, 2022 by which even if an assessee did not earn any exempt income, the provisions of Section 14A would still apply.

Madhur Agrawal, on behalf of the assessee pointed out that the amendment to Section 14A of the Income Tax Act introduced by the Finance Act 2022 had been made applicable by the Legislature from Assessment Year 2022-23 and onwards and therefore did not have any application in the relevant AY 2014-15.

The two-member Bench of Aby T. Varkey, (Judicial Member) and Om Prakash Kant, (Accountant Member) noted that the Revenue had raised similar contention in the case of ACIT vs K Raheja Corporate Services Pvt. Ltd. (2021). Rejecting the same, this Tribunal had held that the Explanation introduced in Section 14A of the Income Tax Act by the Finance Act 2022 had prospective application. Accordingly, it was held that, if during the relevant year, the assessee had not earned any tax-free income, disallowance of expenditure under Section 14A of the Income Tax Act was not permissible

The Bench allowed this ground of appeal filed the assessee holding that the assessee did not earn any exempt income during the relevant year, and upheld the action of deleting the disallowance made by the AO under Section 14A of the Income Tax Act, both while computing income under normal provisions and book profit under Section 115JB of the Income Tax Act.

To Read the full text of the Order CLICK HERE

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