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Facts
The revenue appealed against the CIT(A)'s order deleting a disallowance of Rs. 1,99,54,828 made by the AO under section 14A. The assessee had suo motu disallowed Rs. 59,50,496, representing 0.5% of investments that yielded dividend income. The AO applied Rule 8D(2)(iii) to the entire investment portfolio, leading to a higher disallowance.
Held
The Tribunal held that the amendment to Section 14A, inserting an Explanation, is prospective and not retrospective. Following precedents, the Tribunal ruled that disallowance under Section 14A should only be made on investments that actually yielded exempt income.
Key Issues
Whether the amendment to Section 14A by the Finance Act, 2022, with its explanatory provision, is retrospective or prospective in nature, and whether disallowance under Section 14A is applicable on investments not yielding exempt income.
Sections Cited
14A, 143(3), 139(1), 115JB, 8D(2)(iii)
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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, ACCOUNT MEMBER & SHRI ANIKESH BANERJEE
O R D E R Per Anikesh Banerjee (JM):
The instant appeal of the revenue was filed against the order of the Learned Commissioner of Income Tax (Appeal)-40, Mumbai [hereinafter called, ‘Ld. CIT(A)] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for Assessment Year 2016-17, date of order 28/01/2025. The impugned order was emanated from the order of the Learned Assistant Commissioner of Income-tax, 2 ITA 2432/Mum /2025 Gateway Distriparks Ltd Circle-1(1)(2), Mumbai [in short, the “Ld. AO”] passed under section 143(3) of the Act, date of order 30/12/2018.
The revenue has taken the following grounds of appeal:- “1) Whether on the facts and circumstances of case, the Ld. CITIA) erred in deleting the addition of Rs. 1,99,54,828/ made by the AO u/s 14A of the Act?
2) Whether on the facts and circumstances of case, the Ld. CIT(A) was right in restricting the suo moto disallowance made by the assessee of Rs. 59,50,496/-2 3) Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in deleting the disallowance made u/s 144 in view of Explanation to Section 14A, inserted by Finance Act, 2022, which clarifies that the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income tinder this Act, has not accrued or arises 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?
4) Whether on the facts and in the circumstances of the case and in law, the Id CITA) was right in allowing assessee's appeal by relying on the judicial decision in the case of Sajjan India Lid us ACIT (ITAT, Mumbai) (2018) and Vireet Investment Pvt Ltd vs ACIT (ITAT, Delhi) (2017), which predate the amendment made in way of insertion of Explanation to Section 144 by Finance Act, 2022?
5) The appellant craves leave to add, to amend, alter/delete and/ or modify the above grounds of appeal in or before the final hearing.”
The assessee filed its return of income under section 139(1) of the Act. The case was selected for scrutiny, and assessment was completed under section 143(3) of the Act. During the course of assessment proceedings, the Ld. AO observed that the assessee had earned dividend income amounting to Rs.18,36,27,060/-. The total investment in shares during the relevant assessment year stood at Rs.504,25,64,868/-. The assessee, on a suo motu basis, disallowed an 3 ITA 2432/Mum /2025 Gateway Distriparks Ltd amount of Rs.59,50,496/- under section 14A of the Act, read with Rule 8D(2)(iii) of the Income-tax Rules, 1962. This disallowance was computed at 0.5% of the average value of investments that actually yielded dividend income. The assessee disclosed that the dividend was received only from investments in: M/s Snowman Logistics Ltd – Rs.104,16,99,000/-, and M/s Gateway East India Pvt. Ltd – Rs.14,84,00,000/- Accordingly, the disallowance was restricted to the above dividend-yielding investments. However, the Ld. AO rejected the assessee’s working and applied Rule 8D(2)(iii) on the entire average investment portfolio of Rs.518,10,64,868/-, thereby computing the disallowance at Rs.2,59,05,324/-. Consequently, the total disallowance under section 14A read with Rule 8D was computed at Rs.2,63,25,324/-, including the suo motu disallowance made by the assessee. Further, the Ld. AO also added this amount to the book profit under section 115JB. As the assessee had already disallowed Rs.59,50,496/- in both the computation of income and computation of book profit, the balance amount of Rs.1,99,54,828/- was added to the total income and book profit of the assessee. Aggrieved by the said disallowance, the assessee filed an appeal before the Ld. CIT(A). After considering the submissions and facts, the Ld. CIT(A) accepted the assessee’s explanation and restricted the disallowance to the amount suo motu disallowed by the assessee, i.e., Rs.59,50,496/-. The balance disallowance of Rs.1,99,54,828/- was deleted. Being aggrieved by the relief granted by the Ld. CIT(A), the revenue has preferred the present appeal before us.
4 ITA 2432/Mum /2025 Gateway Distriparks Ltd 4. The Ld. DR appeared and advanced arguments in support of the assessment order, relying on the four grounds raised by the revenue.
5. The Ld.AR on the other hand, submitted that the insertion of Explanation 14A was made in the amendment made in Finance Act, 2022. Relying on the judicial decision Special Bench of coordinate bench of ITAT-Delhi in ACIT vs. Vireet Investment Pvt Ltd vs ACIT 165 ITD 27 (Delhi-Trib), which pre-date the amendment made in the form of insertion of Explanation to section 14A of Finance Act, 2022, has been re-affirmed by Hon’ble Mumbai ITAT in the case of Reliance Power Ltd (2024) 159 taxmann.com 1626 (Mumbai Tribunal), by holding as below:-
“19) Assessee aggrieved with the disallowance made by the learned AO, approaching the CIT - A who held deleted the disallowance holding that in absence of any exempt income disallowance was impermissible. Accordingly, he deleted the disallowance under section 14 A read with rule 8D in the normal computation of total income as well as computation of book profit under section 115JB of the act. All other contentions raised by the assessee were not dealt with by the learned CIT - A. Therefore, aggrieved with the order of the learned CIT - A both the parties are in appeal before us.
20) In the appeal of the assessing officer the only contention is that even if there is no exempt income, the disallowance under section 14 A is required to be made placing reliance on the circular number 5 - 2014 as well and the amendment to the act subsequently.
21) Assessee is also aggrieved that the learned CIT - A has not made with its alternative contentions stating that only the investments which have yielded the exempt income during the year are required to be considered for working out disallowance under rule 8D (2) (iii) and further no disallowance of interest can be made under rule 8D (2) (ii)of the act also on the investments which have not yielded exempt income during the year.
5 ITA 2432/Mum /2025 Gateway Distriparks Ltd 22) We have carefully heard the rival contention and find that when the assessee does not have any exempt income during the year, assessee did not claim any exemption and therefore there cannot be any disallowance under section 14 A of the act. Further the amendment made to the income tax act is also applicable with effect from 1 April 2022 and held by the honourable Delhi High Court. In the result we do not find any merit in the appeal of the learned assessing officer. Accordingly, ITA number 3423/M/2023 is dismissed. Further the appeal of the assessee in ITA number 3044/M/2023 on principal is allowed however there is no exempt income during the year, such issue becomes academic. In the result, appeal of the assessee is allowed as indicated above.”
And similar view was rendered by the Hon’ble Delhi High Court in the case of Era Infrastructure India Ltd (2022) 141 taxmann.com 289 (Del) where it was held that the insertion of Explanation to section 14A to Finance Act, 2022 is only applicable prospectively and not retrospectively and so is not applicable for the impugned assessment year. Further, the Tribunal has been holding consistently that the calculation of disallowance under section 14A should be made only on the income yielding investment. So, on the entire amount of the investment should not be considered.
We have heard the rival submissions and perused the material available on record. The issue under consideration is that the assessee, on a suo motu basis, disallowed a sum of Rs.59,50,496/-, being 0.5% of the average value of investments that actually yielded dividend income, namely Rs.104,16,99,000/- and Rs.14,84,00,000/-. It is an admitted position that the remaining investments did not yield any exempt income during the relevant assessment year. The revenue, on the other hand, has raised a ground relying on the amendment introduced by the Finance Act, 2022, whereby an Explanation was inserted to section 14A of the Act. The Revenue contends that the said amendment has retrospective application and 6 ITA 2432/Mum /2025 Gateway Distriparks Ltd is applicable to the impugned assessment year. However, the issue of retrospective applicability of the said amendment stands settled by the Hon’ble Delhi High Court in the case of PCIT v. ERA Infrastructure (India) Ltd. (supra), wherein it has been held that the Explanation to section 14A inserted by the Finance Act, 2022 is prospective in nature and cannot be applied to assessment years preceding the amendment. In light of the above binding precedent, following the order of Reliance Power Ltd (supra) we find that the Ld. CIT(A) has rightly accepted the assessee’s computation and restricted the disallowance under section 14A of the Act to Rs.59,50,496/-, which is in accordance with the law applicable to the assessment year under consideration. We do not find any infirmity in the order of the Ld. CIT(A) warranting interference. Accordingly, we uphold the same and dismiss the grounds raised
by the revenue.