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Income Tax--Disallowance under Section 14A

Amendment to Section 14A by Finance Act, 2022--Whether Retrospective in Nature

CA. Manoj Gupta

The Finance Act, 2022 had included a new Explanation to section 14A(1) from 1-4-2022, so as to provide that not, withstanding anything to the contrary contained in the Act, the provisions of the section 14A shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. Controversies has erupted about applicability of this Explanation as to whether it is retrospective in nature or not. Diversed judicial opinion has surfaced on the issue. The learned author analyses the issue.

1. Position prior to amendment by the Finance Act, 2022

Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act has clarified that rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in particular year has not earned any exempt income.--Vide Circular No. 5/2014, dt. 11-2-2014.

It is now almost settled that in absence of any exempt income being earned section 14A cannot be invoked.

In the case of CIT v. Sivam Motors (P.) Ltd. in ITA No. 88 of 2014, dated 5-5-2014 (All-HC), it was held that in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance.

In the case of CIT v. Winsome Textile Industries Ltd. 2009 TaxPub(DT) 2012 (P&H-HC) : (2009) 319 ITR 204 (P&H), it was held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. Also see, CIT v. Corrtech Energy (P) Ltd. in Tax Appeal No. 239 of 2014, dated 24-3-2014 (Guj-HC), CIT v. Lakhani Marketing Incl. in ITA No. 970 of 2008, dated 2-4-2014 (P&H-HC), Pr. CIT v. Shreno Ltd. 2018 TaxPub(DT) 8013 (Guj-HC) : (2018) 409 ITR 401 (Guj) : (2019) 261 Taxman 239 (Guj) and Pr. CIT v. Caraf Builders & Constructions (P) Ltd. 2018 TaxPub(DT) 7786 (Del-HC) : (2019) 261 Taxman 47 (Del).

In Cheminvest Ltd. v. CIT ITA No. 749/2014 (Del-HC), it was held that section 14A will not apply if no exempt income is received or receivable during the relevant year.

In CIT v. Chettinad Logistics (P.) Ltd. 2017 TaxPub(DT) 1144 (Mad-HC) : (2017) 248 Taxman 55 (Mad-HC), it was held that there was no dividend income which did not form part of total income of the assessee was earned in relevant assessment year, therefore, addition made by assessing officer relying on section 14A was completely contrary to provisions of that section. [SLP Dismissed CIT v. Chettinad Logistics (P) Ltd. (2018) 257 Taxman 0002 (SC)] Also see, Redingtion (India) Ltd. v. ACIT TCN No. 52/2016 (Mad-HC).

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