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Facts
The Revenue appealed against the order of the CIT(A) deleting an addition of Rs. 1,84,67,187 made on account of cash deposits during demonetization and a disallowance of Rs. 2,95,000 under Section 14A. The assessee, engaged in coaching classes, had declared a total income of Rs. 9,60,27,210. The AO added Rs. 1,84,67,187 for unexplained cash credits and Rs. 2,95,000 under Section 14A. The CIT(A) allowed the appeal.
Held
The Tribunal held that the addition of Rs. 1,84,67,187 was made on the basis of suspicion and surmises, without rejecting the assessee's books of account, leading to double addition. Regarding the Section 14A disallowance, the Tribunal found that no exempt income was earned by the assessee during the year, making the disallowance impermissible. The amendment to Section 14A was held to be prospective, not applicable to the assessment year in question.
Key Issues
Whether the addition of cash deposits during demonetization as unexplained cash credit is sustainable without rejecting books of account, and if disallowance under Section 14A is permissible in the absence of exempt income.
Sections Cited
68, 14A, 143(3), 8D
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Income Tax Appellate Tribunal, LUCKNOW BENCH “B”, LUCKNOW
Before: SHRI ANADEE NATH MISSHRA & SHRI SUBHASH MALGURIA
Revenue for assessment year 2017-18 against impugned appellate order dated 23/09/2020 of Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. Grounds of appeal are as under:
“1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.1,84,67,187/- made by the AO on account of cash deposits during demonetization period on account of failure on the part of the assessee to prove genuineness of the cash credits transactions in his books of account to his satisfaction.
The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.1,84,67,187/- made by the AO u/s 68 of I.T. Act, 1961 on account of unexplained cash deposits during demonetization period due to sales credited to its books of account to the extent unsupported by past trend.
The Ld.CIT(A) has erred in law and on facts by deleting the disallowance of Rs.2,95,000/- u/s 14A of the I.T. Act read with Rules 8D of I.T. Rules 1962 as the express provision of section 14A r.w.s 8D do not draw any relation to such expenditures in relation to exempt income.”
(B) The facts of the case, in brief, are that the assessee company is engaged in the business of coaching classes for competitive exams and also conducts programs for the National Skill Development Corporation. The company provides coaching through its 140 centres across India. The assessee filed its return of income on 31/10/2017 showing total income of Rs.9,60,27,210/-. The Assessing Officer processed the return filed by the assessee u/s 143(3) of the Act and determined the total income of the assessee company at Rs.11,47,89,400/- by making addition of Rs.1,84,67,187/- under section 68 of the I.T. Act and an addition of Rs.2,95,000/- 14A of the Act read with Rule 8D of the I.T. Rules, 1962. Aggrieved, the assessee carried the matter in appeal before learned CIT(A), who allowed the appeal of the assessee on both issues. Aggrieved with the order of learned CIT(A), in deleting the additions made by the Assessing Officer, Revenue is in appeal before the Income Tax Appellate Tribunal.
(C) During the course of hearing in Income Tax Appellate Tribunal, written submissions were filed from the assessee’ side, under the title “Short Note of Propositions and Case Laws Relied from assessee side”; which is reproduced below for the ease of reference:
(C.1) A Compilation of case laws was also submitted from the assessee’s side, consisting of the following precedents:
(C.1.1) Copies of orders in the following cases were also filed from the assessee’s side:
(i) Pr. CIT vs. Era Infrastructure (India) Ltd., (Delhi High Court) (ii) ITAT, Lucknow Bench order in the case of APCO Infratech Pvt. Ltd. vs. DCIT in (C.1.2) Learned Counsel for the assessee also relied on the following precedents:
ITAT Lucknow Bench order dated 29/07/2025 in the case of Badri Prasad Kedar Nath vs. DCIT, & 359/Lkw/2020 2. Pr.CIT vs. M/s Era Infrastructure (India) Ltd., Delhi High Court 3. ITAT Mumbai Bench order dated 20/09/2021 in the case of North Karnataka Expressway Ltd. vs. ACIT, I.T.A. No.4160/Mum/2013 (D) At the time of hearing before us, learned Departmental Representative relied on the impugned order of learned CIT(A) and assessment order.
(D.1) The learned A.R. for the assessee placed reliance on the aforesaid written submissions referred to in foregoing paragraph (C) of this order; on case laws and precedents referred to in foregoing paragraph (C.1) of this order; and on the impugned appellate order of learned CIT(A).
(D.2) We have heard both sides patiently; and we have also perused the materials on record carefully.
(D.2.1) Grounds 1 and 2 of appeal pertain to an addition of Rs.1,84,67,187/- made by the Assessing Officer under section 68 of the I.T. Act on account of cash deposits made by the assessee during demonetization period. On perusal of records, it is found that the Assessing Officer has accepted the books of account; and no defects have been pointed out either by the Assessing Officer or by the learned CIT(A) in the books of account. The nature of business of the assessee (running coaching classes for competitive examinations) is such that a substantial amounts of revenues are received in cash; which is the consistent trend in earolier and following years also. In fact, as per materials on record; ratio of cash received to total receipts is 81.41%, 92.13%, 50.25% and 73.19% respectively in assessment year 2014-15, 2015-16 and 2017-18. Increase in the percentage figure in assessment year 2017-18 compared to assessment year 2016-17 is explained by the fact, that in assessment year 2017-18 the assessee discontinued the practice to receive payments through online mode. Simultaneously, as explained, the discounts given on online payment was no longer necessary (due to discontinuation of online payment) which resulted in increase in net profit ratio. The books of account are audited, and no adverse observation is made by the auditor in the audit report. No specific transaction of receipt of fees is proved or even claimed by Revenue to be fake, bogus, incorrect or manipulated in any manner. No discrepancy has been pointed out by Revenue between Income Tax Return and VAT Return. The aforesaid amount of Rs.1,84,67,187/- has already been taken into consideration by the assessee for computation of income; and the addition of this amount again in the assessment order leads to double addition. There is no justification for the double addition in the orders of the learned CIT(A) and the Assessing Officer. In view of the foregoing, it is held that the Revenue has failed to make a good case for aforesaid addition of Rs.1,84,67,187/-; and the addition has been made merely on the basis of suspicion, surmises, doubt and vagueness; which cannot be sustained. Accordingly, we direct the Assessing Officer to delete the aforesaid addition of Rs.1,84,67,187/-. Thus, grounds 1 and 2 of appeal are dismissed.
(E) The third ground of appeal pertains to disallowance of Rs.2,95,000/- made by the Assessing Officer u/s 14A of the I. T. Act read with Rule 8D of the I.T. Rules. The learned Departmental Representative relied on the assessment order. The learned A.R. for the assessee relied on the impugned appellate order of the learned CIT(A). He also placed reliance on the precedents referred to in foregoing paragraphs (C.1.1) and (C.1.2) of this order. He submitted that it was not in dispute that no new investment was made by the assessee during the year which could yield exempt income. He further submitted that even in respect of existing investments, it was not in dispute that no exempt income was earned during the year. Thus, he contended, no expenditure was incurred by the assessee for earning any exempt income. Therefore, he submitted, any disallowance u/s 14A of I.T. Act was unjustified.
(E.1) In Cheminvest Ltd. vs. CIT 378 ITR 33 (Delhi), it has been held by Hon'ble High Court that in the absence of any exempt income, any disallowance u/s 14A of I. T. Act is impermissible. Similar view has been taken by the Hon'ble High Court in the case of CIT vs. GVK Project & Technical Services Ltd. [2019] 106 taxmann.com 180 (Delhi). In the case of Pr.CIT vs. State Bank of Patiala 391 ITR 218 (P&H), it was held by Hon'ble High Court that disallowance u/s 14A of I. T. Act cannot exceed exempt income. In the case of DCIT vs. UP Power Corpn. Ltd. (order dated 04/10/2019 in it has been held by Co-ordinate Bench of ITAT, Lucknow, following order of Hon'ble Allahabad High Court in the case of CIT vs. Shivam Motors (P) Ltd., [order dated 05/04/2014 in that no disallowance can be made under section 14A in the absence of any exempt income. The relevant portion of order of Hon'ble Allahabad High Court in the aforesaid case, is reproduced as under:
“S. 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s.14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of law.”
(E.1.1) Our attention was drawn by learned Departmental Representative to explanation inserted by Finance Act, 2022 in amendment of section 14A of the Act, reproduced below for the ease of reference:
“[Explanation.—For the removal of doubts, it is hereby clarified 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 the income, not forming part of the total income under this Act, has not 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 income not forming part of the total income.] (E.1.2) The learned D.R. contended that the explanation has retrospective effect and the assessee is hit by the aforesaid explanation. She further submitted that considering the aforesaid explanation, the disallowance made by the Assessing Officer u/s 14A of the Act should be confirmed. The learned Authorized Representative for the assessee submitted that the aforesaid explanation to section 14A of I.T. Act is prospective in nature; and in view thereof, it has no application to the present case.
(E.2) Whether the aforesaid explanation to section 14A of the Act is retrospective or prospective has been considered by various Hon'ble High Courts in the cases reported as Pr. CIT vs. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi), Williamson Financial Services Ltd. vs. CIT [2024] 166 taxmann.com 607 (Gauhati) and Pr. CIT vs. Avantha Realty Ltd. [2024] 164 taxmann.com 376 (Calcutta). In these decisions, Hon'ble High Courts have held that the amendment to section 14A of the Income Tax Act, whereby the aforesaid explanation was inserted, is prospective in nature, and not retrospective. Respectfully following the aforesaid decisions of Hon'ble High Courts, it is held that explanation to section 14A of the Act, inserted by amendment brought about by Finance Act, 2022, with effect from 01/04/2022, is prospective in nature and has no application to the assessment year 2016-17 to which this appeal pertains. Accordingly, it is held that the assessee is not hit by the aforesaid explanation to section 14A of the Act in so far as assessment year 2017-18 is concerned.
(E.2.1) In view of the foregoing discussion; and respectfully following the precedents mentioned in foregoing paragraphs (E.1) and (E.2) of this order, it is held that no disallowance was permissible having regard to facts and circumstances of the present case, applicable law, and decided precedents. Accordingly, we decline to interfere with the order of learned CIT(A) on this issue; and dismiss ground -3 of appeal.
(F) In the result, the appeal is dismissed for statistical purposes.
(Order pronounced in the open court on 15/10/2025)