Summary : The ITAT Bangalore in Shankara Building Products Ltd. vs. DCIT, Circle-6(1)(1), Bangalore held that no disallowance under section 14A read with Rule 8D can be made for assessment years prior to AY 2022-23 where the assessee has not earned any exempt income during the relevant year. In this case, despite the assessee having substantial investments in subsidiary companies and claiming finance costs, it had neither received exempt income nor claimed any exempt income in its return for AY 2020-21. Nevertheless, the Assessing Officer disallowed Rs. 43.42 lakh under section 14A, which was affirmed by the CIT(A). The Tribunal noted that settled judicial precedents consistently hold that section 14A is inapplicable in the absence of exempt income. It further ruled that the Explanation inserted by the Finance Act, 2022 to section 14A, permitting disallowance even without exempt income, operates prospectively from AY 2022-23 and cannot be applied retrospectively. Accordingly, the disallowance was deleted.
Core Issue. Whether a disallowance under section 14A read with Rule 8D can be made when the assessee has not earned any exempt income during the relevant assessment year, and whether the amendment made by the Finance Act, 2022 to section 14A applies retrospectively.
Facts. The assessee, engaged in the business of retailing home improvement and building products, filed its return of income for AY 2020-21 declaring total income of Rs. 34.08 crore. During scrutiny assessment, the Assessing Officer noticed that the assessee had investments of approximately Rs. 48.37 crore in subsidiary companies and had claimed finance costs of about Rs. 31.69 crore. Although the assessee had not earned any exempt income during the year, the Assessing Officer proposed a disallowance under section 14A read with Rule 8D. The assessee contended that since no exempt income had been earned or claimed exempt in the return, section 14A had no application.
Findings of the AO and CIT(A). The Assessing Officer rejected the assessee’s explanation and computed a disallowance of Rs. 43.42 lakh under section 14A read with Rule 8D. The CIT(A) upheld the disallowance and confirmed the assessment order, holding that the provisions of section 14A were attracted despite the absence of exempt income.
ITAT Findings. The Tribunal observed that it was an undisputed fact that the assessee had not earned any exempt income during the relevant previous year and had not claimed any exemption under the Act. Relying on settled judicial precedents, the Tribunal held that section 14A cannot be invoked where no exempt income is earned or receivable during the year.
The Tribunal further examined the amendment introduced by the Finance Act, 2022, which inserted an Explanation to section 14A providing that disallowance could be made even if no exempt income had accrued, arisen or been received during the year. Following the decision of the Delhi High Court in Era Infrastructure (India) Ltd., the Tribunal held that the amendment is prospective and applicable only from AY 2022-23 onwards. Since the appeal related to AY 2020-21, the amendment could not be relied upon to sustain the disallowance.
Accordingly, the Tribunal held that the disallowance of Rs. 43.42 lakh under section 14A read with Rule 8D was wholly unsustainable and directed its deletion.
Cases Relied Upon
1. Cheminvest Limited Versus Commissioner of Income Tax-VI – Held that section 14A does not apply where no exempt income is earned during the relevant year.
2. Pr. Commissioner of Income Tax-6 Versus M/s. Kohinoor Project Pvt. Ltd. – Confirmed that no disallowance under section 14A can be made in the absence of exempt income.
3. Pr. Commissioner of Income Tax (Central)-2 Versus M/s. Era Infrastructure (India) Ltd. – Held that the Finance Act, 2022 amendment to section 14A is prospective and applicable only from AY 2022-23 onwards.
Ratio Decidendi. For assessment years prior to AY 2022-23, no disallowance under section 14A read with Rule 8D can be made where the assessee has not earned any exempt income. The amendment introduced by the Finance Act, 2022 extending section 14A to cases where no exempt income is earned operates prospectively and cannot be applied retrospectively. Consequently, any disallowance under section 14A for earlier years in the absence of exempt income is liable to be deleted.
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