In a recent decision, the Income Tax Appellate Tribunal ( ITAT ), Visakhapatnam Bench, has ruled that no addition can be made under Section 14A read with Rule 8D when an assessee has not earned any exempt income during the relevant assessment year. The decision was issued in the case of Ace Urban Developers Private Limited against the Assistant Commissioner of Income Tax (ACIT), Circle-2(1), Vijayawada.
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The assessee, a Hyderabad-based company, argued that it had not earned any exempt income during the Assessment Year (AY) 2017-18. The Assessing Officer (AO), however, proceeded to disallow expenses under Section 14A by applying Rule 8D of the Income Tax Rules, 1962. The CIT(A) had upheld this view, citing the Finance Act, 2022, which inserted an Explanation to Section 14A, making the provision applicable even in cases where no exempt income is earned.
The ITAT reviewed the assessee’s claims, the AO’s arguments, and judicial precedents. The Visakhapatnam Bench cited the Delhi High Court’s ruling in PCIT vs. IL&FS Energy Development Company Ltd, which categorically held that Section 14A cannot be invoked if the assessee has not earned any exempt income.
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It was observed that, “We have gone through the record in the light of the submissions made on either side. It can be seen from the impugned order that the assessee had taken the plea that no exempt income was earned by it during the year under consideration. In the case of Principal Commissioner of Income Tax vs. IL&FS Energy Development Company Ltd (2017), the Hon’ble Delhi High Court held that no disallowance could be made U/s. 14A of the Act, if no exempt income was earned by the assessee. Further, in the case of PCIT vs. Era Infrastructure (India) Limited (supra), the Hon’ble Delhi High Court has held that the Explanation to section 14A cannot be presumed to have retrospective effect and it shall be made applicable only with effect from 01/04/2022.”
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Furthermore, the tribunal bench of S. Balakrishnan, Accountant Member and K. Narasimha Chary, Judicial Member also relied on PCIT vs. Era Infrastructure (India) Limited, which had clarified that the Explanation to Section 14A introduced in 2022 was prospective, not retrospective. Since the assessment year under dispute was 2017-18, the ITAT held that no disallowance could be made.
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