The Delhi High Court in a recent Income Tax Appeal against Sahara India Financial Corporation held that no disallowance of any expenditure under Section 14A of the Income Tax Act, 1961 is permissible in the event that the Assessee does not gain any tax-exempt income under statutory provisions.
The decision was rendered by the Delhi High Court while hearing an Income Tax Appeal filed by the Principal Commissioner of Income Tax, impugning an order dated 02.01.2024 of the Income Tax Appellate Tribunal (ITAT) in respect of the financials of the Assessee for Assessment Year (A.Y.) 2016-17.
The events leading upto the present Appeal follows the Assessee’s filing of income returns for A.Y. 2016-17, declaring a loss of Rs.10,61,62,881/-. The returns were earmarked for scrutiny by the Assessing Officer (AO) who assessed the Assessee’s total income at Rs.92,07,100/-, inclusive of a Rs.6,13,17,433/- addition on account of disallowed expenditure under Section 14A of the Income Tax Act, 1961.
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The AO adduced reasoning that the investments were made for yielding income that was not chargeable to tax. The disallowance was refuted by the Assessee averring that there could be no disallowance of expenditure under Section 14A since the Assessee does not accrue any income exempt from taxation.
Upon appeal, the Commissioner of Income Taxes (Appeals) ( CIT(A) ) disallowed the addition of Rs.6,13,17,433/- on account of disallowed expenditure under Section 14A of the Income Tax Act, 1961 citing that the Assessee did not have any tax-exempt income. The decision of the CIT(A) was concurred with by the Income Tax Appellate Tribunal (ITAT).
In the present Appeal, the Revenue alluded to the explanation added to Section 14A by Finance Act, 2022, insisting that the provisions of Section 14A shall apply to the present case.
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The Division Bench of the Delhi High Court constituted by Justice Vibhu Bakhru and Justice Swarana Kanta Sharma referred to the Decision of the Delhi High Court in Principal Commissioner of Income – tax v. Era Infrastucture (India) Ltd. (2022) to observe that the explanation to Section 14A of the Income Tax Act, 1961 shall only be applicable prospectively and thus not apply to the financials of the Assessee for A.Y. 2016-17.
While dismissing the case, the Bench further held that it is cemented that the Assessee does not possess any exempt income for the relevant assessment year and that no expenditure has been incurred on account of exempt income that would accrue or arise in future years.
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