DCIT, CC-6(4), MUMBAI vs. ANANT RAJ LIMITED, DELHI

On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in ignoring the explanation to the section 14A introduced w.e.f. 01.04.2022 which clearly states that the provisions of the section 14A shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, 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 income not forming of the total income.

The appellant craves to leave, to add, to amend and / or to alter any of the ground of appeal if need be.”

The solitary issue contested in the ground of appeal of the revenue is directed against the decision of ld. CIT(A) in holding that disallowance u/s 14A cannot exceed the exempt income. During the course of assessment the assessing officer noticed that assesse company has made investment in the partnership firms, therefore, assessee was asked to show cause as to why the disallowance u/s 14A should not be made as per Rule 8D of the IT Rule 1962. In response the assessee explained that it had earned dividend income of Rs.11,486/- which was claimed as exempt for the year under consideration. During the course of assessment in support of its contention that disallowance cannot exceed the exempt income the assessee has placed reliance on the following judicial pronouncements: “Cheminvest Ltd. Vs. CIT (Delhi High Court) Joint Investment Pvt. Ltd. Vs. CIT [2015 – TIOL -574- HC- DEL- IT] Pepsico India Holding Pvt. Ltd. Vs. ACIT (2016-TIOL-963-ITAT-DEL] Daga Global Chemicals Pvt. Ltd. Vs. ACIT [ITAT, Mumbai]” However, the AO has not agreed with the submission of the assessee and referred the CBDT Circular No. 5/2014 dated 10.02.2014 that for invoking disallowance u/s 14A, the disallowance of the expenditure can be made even where tax payer has not earned any exempt income. The A.O after referring the provisions of Sec.14A of the Act stated that actually earning of income is not sine qua non for deciding deduction of expenditure laid out or expended wholly or exclusively for purpose of such income. Therefore, AO has computed the disallowance u/s 14A in accordance with Rule 8D to the amount of Rs.3,73,91,600/- and added to the total income of the assessee.

The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee and directed the AO to restrict the disallowance to the extent of exempt income of Rs.11,486/- earned by the assessee during the year under consideration.

During the course of appellate proceedings before us the ld. Departmental Representative has placed reliance on the decision of ITAT Guwahati in the case of Williamson Financial Services Ltd. Vs. ACIT vide ITA No. 156 & 159/Gau/2019 dated 06.07.2022 for A.Y. 2009-10 & 2012-13 and the decision of ITAT Hyderabad in the case of Mandava Holdings (P) Ltd. Vs. DCIT vide ITA No. 2089/Hyd/2017 dated 19.07.2022 for AY. 2014-15 wherein held after referring explanation inserted by Finance Act 2022 to Sec. 14A w.e.f 01.04.2022 that provision shall apply whether or not exempt income has accrued, arisen or received and the provisions of the amended Section is applicable retrospectively.

On the other hand, ld. Counsel submitted that explanation introduced to Sec. 14A vide the Finance Act 2022 w.e.f 01.04.2022 is prospective in nature and therefore, no disallowance could be made u/s 14A when no exempt income is earned prior to assessment year 2022-

The ld. Counsel has placed reliance on the following judicial pronouncements: