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Facts
The assessee company debited certain expenses to its Profit & Loss Account but also disallowed these expenses in its computation of income. The Assessing Officer made an addition under Section 14A read with Rule 8D for disallowance of expenses, which was confirmed by the CIT(A). The assessee argued that no disallowance under Section 14A was warranted as no exempt income was earned and all expenses were already disallowed.
Held
The Tribunal held that since the assessee had disallowed all expenses debited to the Profit & Loss Account in its computation of income and had not earned any exempt income, the provisions of Section 14A were not attracted. Consequently, the addition made by the Assessing Officer and confirmed by the CIT(A) was deleted.
Key Issues
Whether disallowance under Section 14A of the Act is warranted when the assessee has disallowed all related expenses in its computation of income and has not earned any exempt income.
Sections Cited
143(3), 14A, 8D, 115JB
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
order : 30.06.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
1. 1. The present appeal preferred by the Assessee is directed against the order dated 05/03/2025, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the ‘CIT(A)’], whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Assessment Order, dated 21/12/2019, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the Assessment Year 2017-2018.
2. The Assessee has raised following grounds of appeal : “1. On the facts and circumstances of the case and in law, the Hon’ble Commissioner of Income Tax Appeals (hereinafter referred as Assessment Year 2017-2018 “CIT(A)”) erred in confirming the order of Learned Assessing Officer (hereinafter referred as “Ld. AO”) in respect of making disallowance u/s.14A r.w.r. 8D of the Income Tax Act, 1961 amounting to Rs.88,33,795/- without appreciating the submission made by the appellant company. Further, the CIT(A) failed to understand that appellant company has made disallowance of entire expenses debited to profit & loss account amounting to Rs.1,47,316/-. The CIT(A) failed to take cognizance that the appellant company has not earned any exempt income during the year under consideration. It is submitted that CIT(A) has erred in understanding the facts and circumstances of the case and has made an arbitrary addition on the basis of the assumptions and presumptions. Therefore, it is prayed to your honour that the addition confirmed by CIT(A) shall be deleted since the same is unjustified and unwarranted.”
3. The solitary issue raised by way of present appeal pertains to addition of INR.88,33,795/- made by the Assessing Officer under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 [for short ‘IT Rules’] while computing ‘Book Profits’ under Section 115JB of the Act in the Assessment Order, dated 21/12/2019, under Section 143(3) of the Act. The appeal preferred by the Assessee challenging the aforesaid was dismissed by the CIT(A) vide Order, dated 03/05/2025, which has been impugned by the Assessee by way of the present appeal.
We have heard both the sides and have perused the material on record.
It emerges that the Assessee has not claimed deduction for any expenditure and had disallowed entire expenditure of INR.1,29,966/- in the computation of income. During the assessment proceedings the Assessee had claimed that since entire expenditure has been disallowed no disallowance could be made under Section 14A of the Act. It was further contended that the Assessee had also not earned any exempt income and for that reason also no disallowance under Section 14A of the Act was warranted. However, the Assessing Officer rejected the aforesaid contentions of the Assessee and proceeded to compute the disallowance under Section 14A of the Act by applying Rule 8D of the IT Rules to arrive at the figure of INR.
2 Assessment Year 2017-2018 88,33,795/-. The Assessing Officer restricted the amount of disallowance under normal provisions of the Act to INR.1,29,966/- being the entire amount of expenses debited to the Profit & Loss Account. Further, since the Assessee had disallowed INR.1,29,966/-, the Assessing Officer made addition of balance amount of INR.87,03,799/- under Section 14A of the Act while computing ‘Book Profits’ under Section 115JB of the Act. Thus, the Assessing Officer computed total income of the Assessee on the basis of Book Profit under Section 115JB of the Act at INR.86,86,449/-1 and raised tax demand accordingly. The CIT(A) agreed with the Assessing Officer and dismissed the appeal preferred by the Assessee. Therefore, the Assessee is in appeal before the Tribunal.
On perusal of the Profit & Loss Account of the Assessee for the relevant previous year, we find that the Assessee had debited INR.1,47,316/- to the Profit and Loss Account. The relevant extract of the Profit & Loss Account reads as under: (Amount in INR.) Particulars Note No Year Ended Year Ended 31.03.2017 31.03.2016 Other Income - - Total Revenue - - Expenses: Other Expenses 10 1,29,967 93,219 Depreciation & Amortisation Expenses 17,350 17,350 Total Expenses 1,47,316 1,10,569 Loss before and after exceptional and (1,47,316) (1,10,569) extraordinary items and before tax Tax expense: Current tax - - Loss for the year (1,47,316) (1,10,569) Loss per Share (Basic & Diluted) (7.37) (5.53)
For the relevant previous year, the Assessee had disclosed a loss of INR.1,47,316/-. However, on perusal of computation of income we find that the Assessee had disallowed ‘Other Expenses’ of INR.1,29,967/- as well as depreciation and had not claimed any loss for the relevant previous year. Perusal of record shows that the 1 (-) INR.1,47,316/- plus INR.87,03,799/- 3 Assessment Year 2017-2018 Assessee had not earned any income or exempt income during the relevant previous year. We note that in the Assessment Order is silent about amount of exempt income earned by the Assessee. Further, the Assessing Officer has noted that the Assessee had disallowed the entire expenditure (excluding depreciation) amounting to INR.1,29,967/- and has treated the same as amount disallowed under Section 14A of the Act. Thus, we find that in the present case the Assessee had (a) not earned any exempt income during the relevant previous year and (b) entire amount of expenditure debited to Profit & Loss Account was disallowed by the Assessee.
Section 14A of the Act provides that for the purpose of computing total income no deduction shall be allowed in respect of expenditure incurred by the Assessee in relation to the income which does not form part of the total income. Since in the present case, the entire expenditure debited to the Profit and Loss was disallowed by the Assessee in the computation of income, no further disallowance was warranted under Section 14A of the Act. Further, the Assessee had not earned exempt income during the relevant previous year. Therefore, for this reason also, no disallowance was warranted under Section 14A of the Act.2 We also note that the Hon’ble Delhi High Court has, in the case of Principal Commissioner of Income-Tax (Central) -2 Vs. M/s Era Infrastructure India Ltd: 448 ITR 674 (Delhi)[20-07-2022], rejected the contention of the Revenue that amendments to Section 14A introduced by the Finance Act 2022 shall have retrospective effect.
In view of the above, we hold that the provisions of Section 14A of the Act were not attracted in the facts and circumstances of the present case. Accordingly, additions of INR. 87,03,799/- made while computing ‘Book Profit’ under Section 115JB of the Act in respect of 2 PCIT-6 vs. Kohinoor Project Pvt. Ltd. [2020] 425 ITR 700 (Bombay)[27-01-2020] 4 Assessment Year 2017-2018 disallowance made under Section 14A of the Act read with Rule 8D of the IT Rules is deleted. Ground No.1 raised by the Assessee is allowed.
In result, the present appeal preferred by the Assessee is allowed.