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Facts
The assessee filed its return of income, which was selected for scrutiny. The Assessing Officer made a disallowance of Rs.6,35,020 under Section 14A read with Rule 8D, which was subsequently upheld by the Ld. CIT(A).
Held
The Tribunal found that no exempt income was earned by the assessee during the relevant assessment year. Relying on established legal precedents, the Tribunal held that Section 14A cannot be invoked when no exempt income is received or receivable, and the Explanation inserted by Finance Act, 2022, is prospective and inapplicable.
Key Issues
Whether disallowance under Section 14A is applicable when no exempt income is earned; validity of notice issued under Section 143(2).
Sections Cited
14A, 14A(3), 8D, 143(2)
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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
ORDER PER OM PRAKASH KANT, AM
This appeal by the Revenue is directed against order dated 12.11.2024, passed by the Ld. Additional/Joint Commissioner of Income-tax, Patna [hereinafter shall be referred as ‘the Ld. CIT(A)’] for assessment year 2017-18, raising following grounds:
1) That the Hon'ble CIT(A) erred in dismissing the appeal without providing adequate opportunity to the appellant to present its case, thereby violating principles of natural justice. Hence the appellate order passed be set aside.
Ankur Power Project Pvt. Ltd Ankur Power Project Pvt. Ltd 2 2) For that the Hon'ble CIT(A) erred in facts and law by upholding 2) For that the Hon'ble CIT(A) erred in facts and law by upholding 2) For that the Hon'ble CIT(A) erred in facts and law by upholding the disallowance of Rs.6,35,020 under Section 14A read with Rule the disallowance of Rs.6,35,020 under Section 14A read with Rule the disallowance of Rs.6,35,020 under Section 14A read with Rule 8D of the Income Tax Rules, 1962, despite that, the a 8D of the Income Tax Rules, 1962, despite that, the appellant had 8D of the Income Tax Rules, 1962, despite that, the appellant had not earned any exempt income during the Assessment Year 2017 not earned any exempt income during the Assessment Year 2017 not earned any exempt income during the Assessment Year 2017- 18, thereby making the provisions of Section 14A inapplicable. 18, thereby making the provisions of Section 14A inapplicable. 18, thereby making the provisions of Section 14A inapplicable. Hence, the disallowance of Rs.6,35,020 made u/s 14A of the Act Hence, the disallowance of Rs.6,35,020 made u/s 14A of the Act Hence, the disallowance of Rs.6,35,020 made u/s 14A of the Act be deleted. 3) For that the Hon'ble CIT(A) failed to app 3) For that the Hon'ble CIT(A) failed to appreciate that Section reciate that Section 14A(3) cannot be invoked mechanically merely on the basis of 14A(3) cannot be invoked mechanically merely on the basis of 14A(3) cannot be invoked mechanically merely on the basis of holding investments, especially when no exempt income has holding investments, especially when no exempt income has holding investments, especially when no exempt income has accrued or been received during the relevant previous year. Hence, accrued or been received during the relevant previous year. Hence, accrued or been received during the relevant previous year. Hence, the disallowance of Rs.6,35,020 made u/s 14A of t the disallowance of Rs.6,35,020 made u/s 14A of t the disallowance of Rs.6,35,020 made u/s 14A of the Act be deleted. 4) For that the Id. AO erred in issuing notice u/s 143(2) of the Act 4) For that the Id. AO erred in issuing notice u/s 143(2) of the Act 4) For that the Id. AO erred in issuing notice u/s 143(2) of the Act dated 22.09.2019 without complying to the CBDT Instruction dated 22.09.2019 without complying to the CBDT Instruction dated 22.09.2019 without complying to the CBDT Instruction F.No.225/157/2017/ITA F.No.225/157/2017/ITA-II dated 23.06.2017 and so the notice II dated 23.06.2017 and so the notice issued u/s 143(2) is not valid as per law and hen issued u/s 143(2) is not valid as per law and hence the entire ce the entire assessment order and the assessment proceedings under the Act assessment order and the assessment proceedings under the Act assessment order and the assessment proceedings under the Act is bad in law. is bad in law. 5) The appellant craves leave to produce additional evidences in 5) The appellant craves leave to produce additional evidences in 5) The appellant craves leave to produce additional evidences in terms terms terms of of of Rule Rule Rule 29 29 29 of of of the the the Income Income Income Tax Tax Tax (Appellate (Appellate (Appellate Tribunal) Rules Rules 1963."
Briefly stated, facts of the case are that assessee filed its Briefly stated, facts of the case are that assessee filed its Briefly stated, facts of the case are that assessee filed its return of income on 20.09.2017 declaring total income at return of income on 20.09.2017 declaring total income at return of income on 20.09.2017 declaring total income at Rs.69,030/-. The return of income filed by the assessee was . The return of income filed by the assessee was . The return of income filed by the assessee was selected for scrutiny and statutory notices under the Income-tax selected for scrutiny and statutory notices under the Income selected for scrutiny and statutory notices under the Income Act, 1961 (in short ‘the Act’) were issued and complied with. In the n short ‘the Act’) were issued and complied with. In the n short ‘the Act’) were issued and complied with. In the assessment completed, the Assessing Officer made disallowance assessment completed, the Assessing Officer made disallowance assessment completed, the Assessing Officer made disallowance -tax Rules, 1962 u/s 14A of the Act invoking Rule 8D of the Income u/s 14A of the Act invoking Rule 8D of the Income- (in short ‘the Rules’) amounting to Rs.21,24,260/- however (in short ‘the Rules’) amounting to Rs.21,24,260/ (in short ‘the Rules’) amounting to Rs.21,24,260/ restricted the same to the extent of expenses of Rs.6,35,020/ he same to the extent of expenses of Rs.6,35,020/ he same to the extent of expenses of Rs.6,35,020/-
Ankur Power Project Pvt. Ltd Ankur Power Project Pvt. Ltd 3 claimed in the profit and loss account. On further appeal, the Ld. claimed in the profit and loss account. On further appeal, the Ld. claimed in the profit and loss account. On further appeal, the Ld. CIT(A) upheld the disallowance observing as under: CIT(A) upheld the disallowance observing as under:
“6.5 Despite being given multiple opportunities, the appellant had 6.5 Despite being given multiple opportunities, the appellant had 6.5 Despite being given multiple opportunities, the appellant had not submitted any do not submitted any documentary evidences in support of its claims. cumentary evidences in support of its claims. There is nothing on record to show any inaccuracies in the findings There is nothing on record to show any inaccuracies in the findings There is nothing on record to show any inaccuracies in the findings of the ld assessing officer. of the ld assessing officer. 6.6 Hon’ble Delhi High Court in its decision in the case of The 6.6 Hon’ble Delhi High Court in its decision in the case of The 6.6 Hon’ble Delhi High Court in its decision in the case of The Commissioner of Income taxvs Gold Leaf Capital C Commissioner of Income taxvs Gold Leaf Capital Corporation Ltd. on orporation Ltd. on 02.09.2011 (ITA No. 798 of 2009) had clearly held, 02.09.2011 (ITA No. 798 of 2009) had clearly held, “We fail to understand that when such a conduct of the assessee “We fail to understand that when such a conduct of the assessee “We fail to understand that when such a conduct of the assessee was noted by the Tribunal itself, where was the occasion to give was noted by the Tribunal itself, where was the occasion to give was noted by the Tribunal itself, where was the occasion to give another opportunity to the assessee. Interestingly, the another opportunity to the assessee. Interestingly, the another opportunity to the assessee. Interestingly, the Tribunal was conscious of this fact, which is clear from the reading of Para 35 of conscious of this fact, which is clear from the reading of Para 35 of conscious of this fact, which is clear from the reading of Para 35 of the impugned order. In this para, the Tribunal noticed that there the impugned order. In this para, the Tribunal noticed that there the impugned order. In this para, the Tribunal noticed that there were two coursed open to it. First course was to draw an adverse were two coursed open to it. First course was to draw an adverse were two coursed open to it. First course was to draw an adverse inference against the assesseeand second c inference against the assesseeand second course was to restore the ourse was to restore the matter back to the AO. It chose second course only on the ground matter back to the AO. It chose second course only on the ground matter back to the AO. It chose second course only on the ground that the quantum of amount involved was high, that is hardly a that the quantum of amount involved was high, that is hardly a that the quantum of amount involved was high, that is hardly a ground or justification for restoring and giving premium to the ground or justification for restoring and giving premium to the ground or justification for restoring and giving premium to the assessee for its negligence. In fact, i assessee for its negligence. In fact, it is a clear case where adverse t is a clear case where adverse inference should have been drawn. When the Tribunal itself inference should have been drawn. When the Tribunal itself inference should have been drawn. When the Tribunal itself concluded that the assessee was non concluded that the assessee was non-cooperative, it can naturally cooperative, it can naturally be safely concluded that the assessee did not want to produce be safely concluded that the assessee did not want to produce be safely concluded that the assessee did not want to produce evidence, as it would have exposed th evidence, as it would have exposed that the transactions in at the transactions in question were not genuine and fraudulent. Therefore, we are of the question were not genuine and fraudulent. Therefore, we are of the question were not genuine and fraudulent. Therefore, we are of the opinion that there is a legal error committed by the Tribunal, as in a opinion that there is a legal error committed by the Tribunal, as in a opinion that there is a legal error committed by the Tribunal, as in a case like this, only one course of action is presumed, viz., to draw case like this, only one course of action is presumed, viz., to draw case like this, only one course of action is presumed, viz., to draw adverse inference.” adverse inference.” 6.7 Similarly, Hon’ble Supreme Court of India in its order dated imilarly, Hon’ble Supreme Court of India in its order dated imilarly, Hon’ble Supreme Court of India in its order dated 28/02/2000 in the case of New India Assurance Co. Ltd vs R. 28/02/2000 in the case of New India Assurance Co. Ltd vs R. 28/02/2000 in the case of New India Assurance Co. Ltd vs R. Srinivasan (Appeal (civil) 11439 of 1996) had clearly stated, Srinivasan (Appeal (civil) 11439 of 1996) had clearly stated, Srinivasan (Appeal (civil) 11439 of 1996) had clearly stated, “Every court or judicial body or authority, which has a duty to “Every court or judicial body or authority, which has a duty to “Every court or judicial body or authority, which has a duty to decide a lis between two parties, inherently possesses the power to lis between two parties, inherently possesses the power to lis between two parties, inherently possesses the power to dismiss a case in default. Where a case is called up for hearing and dismiss a case in default. Where a case is called up for hearing and dismiss a case in default. Where a case is called up for hearing and the party is not present, the court or the judicial or quasi the party is not present, the court or the judicial or quasi the party is not present, the court or the judicial or quasi-judicial body is under no obligation to keep the matter pending bef body is under no obligation to keep the matter pending bef body is under no obligation to keep the matter pending before it or to pursue the matter on behalf of the complainant who had to pursue the matter on behalf of the complainant who had to pursue the matter on behalf of the complainant who had instituted the proceedings. That is not the function of the court or, instituted the proceedings. That is not the function of the court or, instituted the proceedings. That is not the function of the court or, for that matter, of judicial or quasi for that matter, of judicial or quasi-judicial body. In the absence of judicial body. In the absence of the complainant, therefore, the court will be w the complainant, therefore, the court will be well within its ell within its jurisdiction to dismiss the complaint for non jurisdiction to dismiss the complaint for non- prosecution” prosecution”
Ankur Power Project Pvt. Ltd Ankur Power Project Pvt. Ltd 4 ITA No. 4432/MUM/2025
6.8 Respectfully relying upon the above judicial pronouncements, 6.8 Respectfully relying upon the above judicial pronouncements, 6.8 Respectfully relying upon the above judicial pronouncements, and on the fact that despite being giving multiple opportunities, no and on the fact that despite being giving multiple opportunities, no and on the fact that despite being giving multiple opportunities, no documentary evidence, had been brought on reco documentary evidence, had been brought on record by the appellant rd by the appellant to prove that the facts and the findings of the Assessing Officer to prove that the facts and the findings of the Assessing Officer to prove that the facts and the findings of the Assessing Officer were incorrect, grounds no. 1 were incorrect, grounds no. 1-3 taken by the appellant are hereby 3 taken by the appellant are hereby dismissed.” 2.1 When the matter came up for hearing before us, none When the matter came up for hearing before us, none When the matter came up for hearing before us, none appeared on behalf of the assessee appeared on behalf of the assessee despite due service of notice and despite due service of notice and no adjournment petition was filed. Accordingly, we proceed to no adjournment petition was filed. Accordingly, we proceed to no adjournment petition was filed. Accordingly, we proceed to dispose of the appeal ex parte qua the assessee, after hearing the dispose of the appeal ex parte qua the assessee, after hearing the dispose of the appeal ex parte qua the assessee, after hearing the Ld. Departmental Representative (DR) and perusing the material Ld. Departmental Representative (DR) and perusing the material Ld. Departmental Representative (DR) and perusing the material available on record.
We have considered the orders of the lower authorities and ve considered the orders of the lower authorities and ve considered the orders of the lower authorities and submissions of the Ld. DR. It is noted from the impugned order of submissions of the Ld. DR. It is noted from the impugned order of submissions of the Ld. DR. It is noted from the impugned order of the Ld. CIT(A) that the assessee had not earned any exempt income the Ld. CIT(A) that the assessee had not earned any exempt income the Ld. CIT(A) that the assessee had not earned any exempt income during the year under consideration. during the year under consideration.
3.1 The issue whether disallowanc The issue whether disallowance under section 14A of the Act e under section 14A of the Act can be made in the absence of exempt income is no longer res- can be made in the absence of exempt income is no longer can be made in the absence of exempt income is no longer integra. The Hon’ble Delhi High Court in . The Hon’ble Delhi High Court in Cheminvest Ltd. v. CIT Cheminvest Ltd. v. CIT [(2015) 378 ITR 33 (Del)] has held that no disallowance under [(2015) 378 ITR 33 (Del)] has held that no disallowance under [(2015) 378 ITR 33 (Del)] has held that no disallowance under section 14A is warranted where no exe section 14A is warranted where no exempt income is earned during mpt income is earned during the relevant assessment year. Similar view has been taken by the the relevant assessment year. Similar view has been taken by the the relevant assessment year. Similar view has been taken by the Hon’ble Bombay High Court in Hon’ble Bombay High Court in PCIT v. Ballarpur Industries Ltd. PCIT v. Ballarpur Industries Ltd. (ITA No. 51 of 2016, judgment dated 13.10.2016), holding that section No. 51 of 2016, judgment dated 13.10.2016), holding that section No. 51 of 2016, judgment dated 13.10.2016), holding that section 14A cannot be invoked when no 14A cannot be invoked when no exempt income is received or exempt income is received or receivable during the year. receivable during the year.
Ankur Power Project Pvt. Ltd Ankur Power Project Pvt. Ltd 5 3.2 Further, we note that the Explanation inserted to section 14A Further, we note that the Explanation inserted to section 14A Further, we note that the Explanation inserted to section 14A by the Finance Act, 2022, which deems that section 14A shall apply by the Finance Act, 2022, which deems that section 14A shall apply by the Finance Act, 2022, which deems that section 14A shall apply even if no exempt income has accrued or arisen, is prospective in even if no exempt income has accrued or arisen, is prospective in even if no exempt income has accrued or arisen, is prospective in nature and cannot be applied to the assessment year under nature and cannot be applied to the assessment year under nature and cannot be applied to the assessment year under consideration. This position has been clarified in several judicial consideration. This position has been clarified in several judicial consideration. This position has been clarified in several judicial pronouncements, including pronouncements, including PCIT v. Era Infrastructure (India) Ltd. PCIT v. Era Infrastructure (India) Ltd. [(2022) 448 ITR 674 (Del)]. [(2022) 448 ITR 674 (Del)].
3.3 In view of the above settled leg In view of the above settled legal position, and the admitted al position, and the admitted fact that no exempt income was earned by the assessee during the fact that no exempt income was earned by the assessee during the fact that no exempt income was earned by the assessee during the relevant previous year, the disallowance made under section 14A of relevant previous year, the disallowance made under section 14A of relevant previous year, the disallowance made under section 14A of the Act and sustained by the Ld. CIT(A) is unsustainable in law. the Act and sustained by the Ld. CIT(A) is unsustainable in law. the Act and sustained by the Ld. CIT(A) is unsustainable in law.
Conclusion
We, therefore, set aside the findings of the lower authorities on set aside the findings of the lower authorities on set aside the findings of the lower authorities on this issue and direct the deletion of the disallowance made under this issue and direct the deletion of the disallowance made under this issue and direct the deletion of the disallowance made under section 14A of the Act. The grounds of the appeal of the assessee section 14A of the Act. The grounds of the appeal of the assessee section 14A of the Act. The grounds of the appeal of the assessee are accordingly allowed. are accordingly allowed.
In the result, the appeal of the assessee is In the result, the appeal of the assessee is allowed. allowed.