DEPUTY COMMISSIONER OF INCOME TAX (CENTRAL CIRCLE) 8(1), MUMBAI vs. MARINE DRIVE HOSPITALITY AND REALTY PRIVATE LIMITED, MUMBAI

In so far as the first issue is concerned, the Ld. CIT(A) deleted the disallowance made under section 14A of the Act on the ground that no disallowance under the said provision can be made where the assessee has not earned any exempt income during the relevant previous year. While arriving at the aforesaid conclusion, the Ld. CIT(A) placed reliance upon the judgment of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. v. CIT, reported in 281 CTR 447, the judgment of the Hon'ble Allahabad High Court in the case of CIT v. Shivam Motors (P.) Ltd. [(2014) 89 CCH 59 (All.)], and the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Winsome Textile Industries Ltd. [(2009) 319 ITR 204].

During the course of hearing before us, the Learned Authorised Representative ("Ld. AR") submitted that the issue is no longer res integra and is squarely covered by a catena of judicial pronouncements holding that no disallowance under section 14A of the Act can be made in the absence of exempt income. In support of the said contention, reliance was placed upon the judgment of the Hon'ble Madras High Court in the case of Chettinad Logistics (P.) Ltd. v. Commissioner of Income-tax, Central-1, Chennai, reported in (2017) 80 taxmann.com 221 (Mad.), wherein it was held that section 14A cannot be invoked where no exempt income has been earned during the relevant assessment year. It was further

We have considered the rival submissions and perused the material available on record. It is an admitted position that the assessee did not earn any exempt income during the relevant previous year. The legal position that no disallowance under section 14A can be made in the absence of exempt income is no longer res integra and stands settled by a series of decisions of various High Courts, including those relied upon by the Ld. CIT(A). We find that the Ld. CIT(A), while deleting the impugned disallowance, has correctly applied the settled principles of law. We, therefore, do not find any infirmity in the findings recorded by the Ld. CIT(A) on this issue.

We also take note of the amendment made to section 14A by insertion of the Explanation through the Finance Act, 2022, which provides that the provisions of section 14A shall apply even where exempt income has not accrued, arisen or been received during the relevant previous year. However, the Hon'ble Delhi High Court in the case of Era Infrastructure (India) Ltd. v. PCIT, reported in (2022) 448 ITR 674 (Delhi), has categorically held that the said amendment is prospective in nature and cannot be applied retrospectively. The Memorandum explaining the provisions of the Finance Bill, 2022 also specifically provides that the amendment shall take effect from 01.04.2022 and shall accordingly apply from Assessment Year 2022-23 onwards. Since the assessment year involved in the present appeal is Assessment Year 2018-

In view of the foregoing discussion and respectfully following the judicial precedents referred to above, we uphold the order of the Ld. CIT(A) deleting the disallowance of Rs.10,86,74,067/- made under section 14A of the Act. Accordingly, the grounds raised by the Revenue on this issue are dismissed.

The second issue relates to the relief granted by the Ld. CIT(A) in respect of the addition made on account of the outstanding balance of Rs.3,06,670/- standing in the name of M/s. Gaud Waterpump Service Ltd. The Ld. AO treated the entire amount as a bogus liability primarily on the ground that the creditor did not respond to the notice issued under section 133(6) of the Act. The assessee was also unable to furnish a confirmation from the said party, explaining that the relevant period coincided with the COVID-19 pandemic.

The Ld. CIT(A), after examining the material available on record, found that the assessee had produced the books of account, ledger extracts, payment details and other primary documentary evidence in support of the impugned expenditure. The Assessing Officer has not pointed out any discrepancy or falsity in the books of account or in the supporting documents produced by the assessee. The addition has been made solely on account of the non-response of the creditor to the notice issued under section 133(6) of the Act. Considering the fact that the verification process remained incomplete only due to the absence of confirmation from the vendor, the Ld. CIT(A) adopted a balanced and pragmatic approach by sustaining the disallowance only to the extent of 12.5% of the impugned amount and deleting the balance addition.

Accordingly, we find no reason to interfere with the order of the Ld. CIT(A) on this issue. The same is upheld and the grounds raised by the Revenue are dismissed.

In the result, the appeal of the revenue is dismissed.