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

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The Tax Publishers 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. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

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.