Mudaliar and Sons Hotels Pvt. Ltd. Vs ACIT (ITAT Mumbai)
amendment to section 14A by the Finance Act, 2022 for making disallowance even no exempt income is earned, is held to be prospective in nature
Income Tax Appellate Tribunal (ITAT) Mumbai has ruled that the amendment to Section 14A of the Income Tax Act, 1961, introduced by the Finance Act, 2022, which allows for disallowances even when no exempt income is earned, is prospective in nature. This decision came in the case of Mudaliar and Sons Hotels Pvt. Ltd. vs. ACIT, where the assessee challenged disallowances made by the Assessing Officer (AO) under Section 14A for the assessment year 2013-14, during which no exempt income was earned.
The AO had disallowed expenses under Section 37(1) and Section 14A, arguing that the assessee had incurred expenses to earn exempt dividend income, despite no such income being realized. The ITAT, however, relied on the precedent set by the Delhi High Court in Era Infrastructure (India) Ltd., which held that the 2022 amendment to Section 14A is applicable only prospectively. Therefore, for assessment years prior to the amendment, disallowances under Section 14A can only be made if the assessee has earned exempt income.
In this case, since Mudaliar and Sons Hotels Pvt. Ltd. did not earn any exempt income during the relevant assessment year, the ITAT concluded that the disallowance made by the AO under Section 14A could not be sustained. The tribunal also addressed the disallowance under Section 37(1), which pertained to expenses claimed as business expenses. The AO had disallowed these expenses, arguing that the assessee had not shown any business income. The ITAT decided to restore this issue to the AO for verification, specifically to determine if the expenses were related to a business that had already commenced.
The ITAT’s ruling clarifies that the retrospective application of the 2022 amendment to Section 14A is not valid, reinforcing the principle that disallowances under this section require the presence of actual exempt income for periods prior to the amendment.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
