Section 14A Disallowance Restricted to Exempt Income Investments: ITAT Upholds CIT(A)’s Order, Rejects Retrospective Amendment Application [Read Order]
The Tribunal upheld the CIT(A)’s order restricting disallowance under Section 14A to Rs. 59.50 lakh on exempt income-yielding investments, rejecting retrospective application of the Finance Act, 2022 amendment and dismissing the Revenue’s appeal.
![Section 14A Disallowance Restricted to Exempt Income Investments: ITAT Upholds CIT(A)’s Order, Rejects Retrospective Amendment Application [Read Order]](https://images.taxscan.in/h-upload/2025/07/30/2070951-itat-mumbai-section-14a-disallowance-income-investments-taxscan.webp "Section 14A Disallowance Restricted to Exempt Income Investments: ITAT Upholds CIT(A)’s Order, Rejects Retrospective Amendment Application [Read Order]")
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that disallowance should be restricted to investments that actually yielded exempt income, rejecting the Revenue’s contention for retrospective application of the Explanation inserted by the Finance Act, 2022.
Gateway Distriparks Ltd (assessee) filed return of income for Assessment Year (AY) 2016-17, declaring dividend income of Rs. 18,36,27,060, which was exempt. The assessee’s total investments stood at Rs. 518,10,64,868, but dividend income was received only from investments in M/s Snowman Logistics Ltd about Rs. 104,16,99,000 and M/s Gateway East India Pvt Ltd for Rs. 14,84,00,000.
The assessee, on a suo motu basis, disallowed Rs. 59,50,496 under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules, 1962, computed at 0.5% of the average value of the dividend-yielding investments.
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The Assessing Officer (AO) rejected this and applied Rule 8D(2)(iii) on the entire investment portfolio, computing disallowance at Rs. 2,59,05,324. After adjusting the assessee’s suo motu disallowance, the AO added Rs. 1,99,54,828 to the total income and book profits under Section 115JB of the Income Tax Act.
Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) accepted the assessee’s computation, restricting the disallowance to Rs. 59,50,496 on the investments that yielded exempt income, and deleted the balance addition of Rs. 1,99,54,828.
Aggrieved by the CIT(A)’s order, the Revenue appealed to the ITAT. The Revenue argued that the disallowance should apply to the entire investment portfolio and relied on the Explanation to Section 14A inserted by the Finance Act, 2022, claiming retrospective applicability even in cases without exempt income accrual. The Revenue cited judicial decisions predating the amendment.
The assessee’s counsel argued that the amendment was prospective, as held by the Delhi High Court in PCIT v. Era Infrastructure (India) Ltd., and which was also reaffirmed by the ITAT in Reliance Power Ltd.
The counsel emphasized that disallowance under Rule 8D(2)(iii) should be limited to investments yielding exempt income, and no exempt income arose from the remaining investments.
The two-member bench, comprising Narendra Kumar Billaiya (Accountant Member) and Anikesh Banerjee (Judicial Member), observed that the remaining investments did not yield any exempt income during the year.
The bench held that the Explanation to Section 14A, inserted by the Finance Act, 2022, is prospective and inapplicable to AY 2016-17, following the Delhi High Court’s ruling in Era Infrastructure (India) Ltd.
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The bench further noted that consistent tribunal decisions, including Vireet Investment Pvt Ltd and Sajjan India Ltd, support restricting disallowance to exempt income-yielding investments. It upheld the CIT(A)’s order, finding no infirmity in the order. The appeal of the Revenue was dismissed.
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