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Facts
The assessee, Zodiac Ventures Ltd., appealed against an order confirming a disallowance of Rs. 15,60,000 made under Section 14A read with Rule 8D for AY 2017-18. The assessee argued that no exempt income was earned, thus Section 14A was not applicable. The AO disallowed the expenditure as the assessee had made investments in shares capable of earning dividend income, even though no dividend was actually earned.
Held
The Tribunal held that for Section 14A to be applicable, exempt income must have been earned. Since the assessee had not earned any exempt income in the year under consideration, the disallowance made under Section 14A r.w.r. 8D was deleted. The appeal was partly allowed regarding the disallowance, and a claim for TDS credit was allowed subject to verification.
Key Issues
Whether the disallowance under Section 14A r.w.r. 8D can be made when no exempt income has been earned by the assessee during the assessment year.
Sections Cited
14A, 143(1), 144, 8D, 250, 199, 37BA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: JUSTICE (RETD.) C V BHADANG&
(Assessment Year: 2017-18) Zodiac Ventures Ltd., Income Tax Officer-11(3)(1), 205-C, 45, Juhu Residency, Aayakar Bhavan, off. Gulmohar Road, Opp. Juhu Club M.K. Road, Mumbai-400020. Vs. Millennium, Juhu, Vile Parle (West), Mumbai-400049. PAN: AAACG0547K Appellant) : Respondent) Appellant /Assessee by : Shri S. C. Tiwari, AR : Shri Arun Kanti Datta, CIT DR Revenue / Respondent by Date of Hearing : 13.08.2025 Date of Pronouncement : 28.08.2025 O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Commissioner of Income Tax / Addl JCIT(A), Agra (in short "FAA") passed under section 250 of the Income Tax Act 1961, (the Act) dated 30.12.2024 for the assessment year (AY) 2017-18. The assessee raised the following grounds of appeal – “1. On the facts and circumstances of the case and in law, the learned AO erred in disallowing Rs. 15,60,000 under Section 14A r.w.r. 8D of the Act. The learned AO ignored the fact that during the assessment year under 2. ITA 4135/Mum/2025 Zodiac Ventures Ltd. consideration, the appellant did not receive any exempt income, and when there is no tax-free income, there cannot be any expenditure incurred for earning exempt income. The appellant, therefore, prays that the disallowance of Rs. 15,60,000 under Section 14A r.w.r. 8D of the Act be deleted.
2. Without prejudice to Ground 1, on the facts and circumstances of the case and in law, the learned AO has wrongly applied and relied on CBDT Circular No. 5/2014 dated 11/02/2014 without application of mind and without considering the genuine facts of the case.”
2. The assessee company is engaged in the business of Architect Services & Estate Agents Services. The assessee filed the return of income for A.Y.2017-18 on 14.10.2017, declaring total income at Rs.8,96,880/-. The return was processed u/s 143(1) by CPC. The case was selected for limited scrutiny and the statutory notices were duly served on the assessee. The AO during the course of proceedings noticed that the assessee has made investments in Equity shares which are capable of earning dividend income that are exempt under the Act. Accordingly the AO issued a show cause notice to the assessee as to why the provisions of section 14A r.w.r.8D cannot be invoked. The assessee submitted that no exempt income has been earned during the year under consideration and therefore disallowance under section 14A cannot be invoked. The assessee further submitted that the investment made is a strategic investment and not made with an intention to earn dividend. The AO did not accept the submissions of the assessee and held that the interest bearing funds are used for the purpose of making the investments. Accordingly the AO made a disallowance of Rs.15,60,000 being 1% of the average investments under section 14A r.w.r.8D(2)(ii). On further appeal the FAA upheld the disallowance by holding that – Analysis 4.1 The primary issue under appeal is the disallowance of Rs. 15,60,000 under Section 14A r.w.r. 8D. The appellant’s contention is that no exempt income was earned during the year, and therefore, the provisions of Section 14A are not applicable. 4.2 The arguments against the appellant are as follows:
3 ITA 4135/Mum/2025 Zodiac Ventures Ltd. (i) Section 14A aims to disallow expenditure incurred in relation to income not forming part of total income. The AO’s reliance on CBDT Circular No. 5/2014 is justified as it clarifies that the disallowance under Section 14A can apply even if no exempt income is earned during the year. (ii) The balance sheet of the appellant shows substantial investments in equity shares, which are capable of generating exempt income. Thus, the provisions of Rule 8D for computing disallowance are applicable. (iii) The Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT upheld the applicability of Rule 8D prospectively and emphasized the importance of apportionment of expenses. (iv) The Supreme Court in Maxopp Investment Ltd. v. CIT held that the dominant purpose of the investment is irrelevant, and any expenditure related to investments capable of generating exempt income must be disallowed. 4.3 Considering the above, the disallowance of Rs. 15,60,000 under Section 14A r.w.r. 8D is upheld. 4.4 Regarding the TDS credit of Rs. 9,00,000, the appellant’s claim is supported by Section 199 and Rule 37BA of the Act, which provide for credit of TDS in the year in which the income is offered. The AO is directed to verify the appellant’s claim and allow the credit accordingly. Conclusion 5.1 Based on the detailed analysis, the disallowance of Rs. 15,60,000 under Section 14A r.w.r. 8D is confirmed. The appellant’s claim for TDS credit of Rs. 9,00,000 is allowed subject to verification by the AO. 5.2 In view of the above findings, the appeal is partly allowed.
The assessee is in appeal against the order of the FAA. There is a delay of 110 days in filing the appeal before the Tribunal. The assessee has filed a petition for condoning the delay stating that the order of FAA was sent to previous consultant who has left the services of the assessee and that only when assessee was trying to file an appeal against the penalty order came to know that the FAA has disposed of the appeal for the year under consideration. The assessee is praying that the reasons for the delay being bonafide and genuine the delay may be condoned. Having heard both the parties and perused the material on record, we are of the view that there is a reasonable and sufficient cause for the delay in filing the appeal before the Tribunal. Therefore following the Hon’ble Supreme Court decision in the case of Collector, Land Acquisition Vs. MST.Katiji & Ors., (167 4 ITA 4135/Mum/2025 Zodiac Ventures Ltd. ITR 471) (SC) we condone the delay of 110 days in filing the appeal and admit the appeal for adjudication.
We heard the parties and perused the material on record. From the perusal of the AO's order we notice that the disallowance under section 14A is made for the reason that the assessee has made investments in shares which are capable of earning dividend income that are tax exempt. While doing so the AO has not disputed the fact that the assessee has not earned any dividend income during the year under consideration. The FAA has confirmed the disallowance by placing reliance on Circular No.5/2014. Prior to insertion of explanation to section 14A it has been consistently held by judicial forums that if there is no exempt income earned by the assessee during the AY then no disallowance can be made under section 14A. However, the revenue's contention is that the explanation being clarificatory in nature, should be applied retrospectively and not from AY 2022-23 from when the same is inserted. The issue of whether the insertion of explanation is retrospective or not has been settled by the Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd (2022) 448 ITR 674 where it has been held that the explanation to section 14A inserted by Finance Act 2022 cannot be applied retrospectively. The relevant observations of the Hon'ble High Court in this regard is extracted below – “5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: "4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not 5 ITA 4135/Mum/2025 Zodiac Ventures Ltd. 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.
This amendment will take effect from 1st April, 2022.
6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.
This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years." (emphasis supplied) 6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 has held that a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced hereinbelow: '9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us.
In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau.)]. It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318) "[I]t is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has (sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand. "
6 ITA 4135/Mum/2025 Zodiac Ventures Ltd.
The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years.
In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read: "Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for— (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India." The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change.
The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4- 1979, it could not be relied on for any purpose for an anterior period.
In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608] .) 15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4-2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) : (1995) 215 ITR 165]. It was also understood as such by 7 ITA 4135/Mum/2025 Zodiac Ventures Ltd. CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3. "5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India. 5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years".
The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it.
As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".' (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:— "22. Second, a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language 8 ITA 4135/Mum/2025 Zodiac Ventures Ltd. is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows : 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".
There was and is no ambiguity in the main provision of section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in SG. Pgnatale [(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India". The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, "income payable for service rendered in India".
When the Explanation seeks to give an artificial meaning to "earned in India" and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively." (emphasis supplied) 8. Consequently, this Court is of the view that the amendment of section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.
5. During the course of hearing the ld AR brought to our attention that in assessee's own case for AY 2016-17 (ITA No.4754/Mum/2023 dated 18.06.2024) the coordinate bench has considered the identical issue and has deleted the disallowance made under section 14A r.w.r.8D. We notice that in assessee's case it 9 ITA 4135/Mum/2025 Zodiac Ventures Ltd. is an undisputed case that the assessee has not earned any exempt income during the year under consideration. Therefore applying the ratio laid down by the Hon'ble High Court in the above case and the decision of the coordinate bench in assessee's own case we hold that for the year under consideration, no disallowance under section 14A could be made since no exempt income is earned by the assessee during the year under consideration. Accordingly we direct the AO to delete the disallowance made under section 14A of the Act.
In result the appeal of the assessee is allowed.