ITAT Clarifies Disallowance u/s 14A of Income Tax is Permissible Even without Exempt Income [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) upheld the disallowance of expenditure under Section 14A of the Income Tax Act, 1961, clarifying that disallowance is permissible even in the absence of exempt income from Assessment Year 2022–23 onwards, following the amendment introduced by the Finance Act, 2022.

Sapphire Foods India Ltd., the assessee, is a prominent operator of KFC and Pizza Hut restaurant chains in India. For the Assessment Year 2022–23, the assessee filed a revised return of income declaring NIL income.

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During scrutiny proceedings, the Assessing Officer (AO) noted that the assessee had made substantial investments of Rs. 1,68.58 crore in a wholly-owned subsidiary and proceeded to disallow Rs. 16,38,260 under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the year.

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The assessee challenged the disallowance, arguing that Section 14A should not apply in the absence of any exempt income and relied on various judicial precedents in its favor, including rulings from the Bombay and Delhi High Courts. The assessee’s counsel also submitted that it had sufficient interest-free funds and the AO had failed to record dissatisfaction with the assessee’s explanation before applying Rule 8D.

The revenue counsel stated that the amended provisions of Section 14A, introduced by the Finance Act, 2022, included an explanation permitting disallowance even when no exempt income had arisen during the year. The revenue counsel explained that administrative expenses are inherently incurred for managing investments, regardless of income generation.

The single-member bench comprising Gagan Goyal (Accountant Member) observed that the amended provisions of Section 14A clearly provided for disallowance even in years where no exempt income was received or accrued. The tribunal further observed that the amendment was applicable prospectively from AY 2022–23, so it squarely applied to the present case.

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The tribunal also held that the AO had issued a detailed show cause notice and applied Rule 8D only to the extent of 1% of the average investment, without making any interest disallowance, to comply with procedural requirements.

The tribunal ruled that the assessee’s reliance on earlier decisions was misplaced, as those were for prior assessment years before the statutory amendment. The tribunal upheld the disallowance of Rs. 16,38,260 made under Section 14A and dismissed the appeal filed by the assessee.

To Read the full text of the Order CLICK HERE

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