In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai Bench dismissed the Revenue’s appeal in a case concerning the applicability of Section 14A of the Income Tax Act, 1961. The case highlights key issues regarding the disallowance of expenses incurred for earning exempt income and the retrospective applicability of amendments made by the Finance Act, 2022.
The dispute involved Welspun Steel Limited, the Assessee, which was assessed for the Assessment Year 2015-16. The Assessing Officer (AO) had disallowed INR 7.98 crore under Section 14A, invoking Rule 8D of the Income Tax Rules, 1962. This disallowance was added to the income of the Assessee, Welspun Steel Limited, to compute taxable income under the normal provisions of the Act. Additionally, the AO applied this disallowance while computing the Book Profits under Section 115JB.
However, the Commissioner of Income Tax (Appeals),CIT(A), ruled in favor of the Assessee by deleting the disallowance under Section 14A. The CIT(A) accepted the argument that no exempt income had been earned by Welspun Steel during the relevant year, thereby making the disallowance under Section 14A unwarranted. Moreover, the CIT(A) followed the Special Bench decision in the case of ACIT vs. Vireet Investments Pvt. Ltd., which had clarified that in the absence of exempt income, no disallowance under Section 14A could be made.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The Revenue challenged the CIT(A)’s decision, arguing that the amendments to Section 14A made by the Finance Act of 2022 should have a retrospective effect. The Revenue pointed out that the Finance Act, 2022 inserted an explanation in Section 14A, clarifying that disallowance under Section 14A should apply irrespective of whether any exempt income was earned. Revenue further contended that this amendment should apply to the current case and that the CIT(A)’s reliance on prior judgments was incorrect.
However, Two Member Bench comprised of Rahul Chaudhary(Judicial Member) and Omkareshwar Chidhara(Accountant Member), after hearing both parties, upheld the CIT(A)’s ruling. The Tribunal relied on the decision of the Hon’ble Bombay High Court, which had held that disallowance under Section 14A could not exceed the amount of exempt income earned during the year. The ITAT also referred to the judgment of the Hon’ble Delhi High Court, which rejected the retrospective application of the amendments made by the Finance Act 2022 to Section 14A.
The ITAT’s ruling is significant as it reinforces the principle that amendments introduced through the Finance Act 2022 to Section 14A apply prospectively from the Assessment Year 2022-23 onwards. This decision provides clarity on the application of Section 14A, ensuring that taxpayers are not subject to retrospective disallowances unless expressly stated in the legislation.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
In conclusion, the ITAT dismissed the Revenue’s appeal, affirming the decision of the CIT(A) and granting relief to Welspun Steel Limited.
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