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Facts
The Revenue appealed the deletion of a disallowance made under Section 14A of the Income Tax Act and a consequential addition to book profit. The assessee had made investments but earned no exempt income during the relevant year. The Assessing Officer invoked Section 14A relying on CBDT Circular No. 5/2014.
Held
The Tribunal held that the disallowance under Section 14A cannot be made in the absence of any exempt income earned, regardless of investments made. This is supported by various High Court judgments and the Tribunal's own consistent decisions. The amendment brought by the Finance Act, 2022, was also held to be prospective.
Key Issues
Whether disallowance under Section 14A is permissible when no exempt income has been earned by the assessee during the assessment year. Whether the amendment brought by the Finance Act, 2022, is retrospective or prospective.
Sections Cited
14A, 115JB, 143(3)
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Income Tax Appellate Tribunal, ‘E’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The present appeal has been preferred by the Revenue against the order dated 29.09.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, arising out of the assessment framed under section 143(3) of the Income-tax Act, 1961, for the assessment year 2017–18, whereby the learned CIT(A) has
Essar Power Ltd., deleted the disallowance of Rs.95,44,19,290/- made by the Assessing Officer under section 14A read with Rule 8D of the Income-tax Rules, 1962, and also deleted the consequential addition made while computing the book profit under section 115JB of the Act.
The Revenue has raised multiple grounds challenging the action of the learned CIT(A), inter alia, contending that the learned CIT(A) erred in deleting the disallowance made under section 14A read with Rule 8D without appreciating that the assessee was holding substantial investments capable of yielding exempt income and, therefore, the proportional disallowance of expenditure incurred in relation thereto was warranted. The Revenue has further contended that the learned CIT(A) erred in holding that no disallowance under section 14A was warranted merely because the assessee had not earned any exempt income during the year, ignoring the CBDT Circular No.5/2014 dated 11.02.2014 and the Explanation inserted by the Finance Act, 2022, which according to the Revenue clarifies that disallowance under section 14A applies irrespective of whether exempt income has accrued or arisen. The Revenue has also challenged the deletion of the corresponding addition made to book profit under section 115JB on the premise that once expenditure relatable to exempt income is disallowed under
The brief facts emerging from the record are that the assessee company is engaged in the business of owning and operating imported coal-based power plants and during the relevant previous year had reflected investments in its balance sheet, primarily in equity shares and preference shares of subsidiary companies. It is an undisputed and admitted factual position borne out from the record that during the relevant previous year, the assessee had not earned any exempt income whatsoever, either by way of dividend or otherwise. During the course of assessment proceedings, the assessee specifically brought this factual aspect to the notice of the Assessing Officer and submitted that in the absence of any exempt income, the provisions of section 14A could not be invoked. In support of this contention, the assessee placed reliance upon binding judicial precedents including the judgment of the Hon’ble Jurisdictional Bombay High Court in the case of Pr. CIT vs. Ballarpur Industries Limited (ITA No. 51 of 2016, Bombay High Court), wherein it was held that the expression “does not form part of the total income” in section 14A envisages actual receipt of income which is not includible in total income during the relevant previous year and in the absence thereof, no disallowance under section 14A can be made.
Essar Power Ltd., 4. The assessee further placed reliance upon the decision of the Hon’ble Jurisdictional Bombay High Court in the case of CIT vs. Delite Enterprises [ITA No.110 of 2009 (Bombay High Court)], wherein the Hon’ble High Court categorically held that where there is no profit from partnership firm during the relevant assessment year, there is no question of disallowance of interest expenditure under section 14A of the Act. The assessee also relied upon various other judicial precedents including Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Delhi High Court), CIT vs. Corrtech Energy Pvt. Ltd. (2015) 372 ITR 97 (Gujarat High Court), and CIT vs. Shivam Motors Pvt. Ltd. (2015) 230 Taxman 63 (Allahabad High Court), wherein it has been consistently held that in the absence of exempt income, disallowance under section 14A cannot be made.
The assessee also submitted that for the purpose of computing book profit under section 115JB, the provisions of section 14A read with Rule 8D cannot be invoked, and reliance was placed upon the Special Bench decision of the Tribunal in ACIT vs. Vireet Investment Pvt. Ltd., wherein it was held that disallowance computed under Rule 8D cannot be imported into computation of book profit under section 115JB.
Essar Power Ltd., 6. However, the Assessing Officer rejected the submissions of the assessee and proceeded to make disallowance under section 14A read with Rule 8D, placing reliance upon CBDT Circular No.5/2014 dated 11.02.2014, observing as under:
“CBDT’s Circular No.5/2014 dated 11th February, 2014 clarifies that disallowance under section 14A of the Act read with Rule-8D needs to be made even in a case where the assessee has not earned exempt income during a particular year… legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.”
Based on the above reasoning, the Assessing Officer computed disallowance of Rs.95,44,19,290/- under section 14A read with Rule 8D and also made the corresponding addition while computing book profit under section 115JB.
Before the learned CIT(A), the assessee reiterated its submissions and also brought to the notice of the learned CIT(A) that identical disallowances made under section 14A in assessee’s own case had been deleted by the Tribunal consistently for multiple assessment years. The learned CIT(A), after examining the factual and legal position and after reproducing and considering the relevant extracts of the Tribunal’s orders in assessee’s own case, recorded a Essar Power Ltd., categorical finding that the investments made by the assessee were strategic investments in subsidiary companies and that the assessee had not earned any exempt income during the relevant previous year.
The learned CIT(A) specifically relied upon the decision of the Tribunal in assessee’s own case for assessment year 2009-10, wherein the Tribunal held:
“Upon careful consideration, we find that it has been held by Hon’ble Delhi High Court as well as Hon’ble jurisdictional High Court that no disallowance u/s 14A is required when the assessee has not earned any exempt income… Hence, respectfully following the precedent, we set aside the orders of the authority below and hold that since the assessee has not earned any exempt income, no disallowance u/s 14A is required.”
The learned CIT(A) further relied upon the decision of the Tribunal in assessee’s own case for assessment years 2010-11 and 2011-12, wherein the Tribunal held: “We have considered rival contentions and found from record that during the year, assessee has not received any exempt income. Respectfully following the same, we do not find any infirmity in the order of CIT(A) for deleting the disallowance made u/s 14A while computing normal income as well as book profit u/s 115JB.”
The learned CIT(A) also relied upon the Tribunal’s order for assessment year 2012-13, wherein the Tribunal categorically held:
“Since the assessee has not earned any exempt income, the question of making any addition to the net profit while computing book profit also does not arise.”
The learned CIT(A) further relied upon the Tribunal’s decision in assessee’s own case for assessment year 2018- 19, wherein after considering the amendment brought by the Finance Act, 2022, the Tribunal held that the amendment is prospective in nature and in the absence of exempt income, no disallowance under section 14A can be made.
After considering the entire factual matrix, the binding judicial precedents including those rendered in assessee’s own case, and the judgments of the Hon’ble High Courts including the Hon’ble Jurisdictional Bombay High Court in CIT vs. Delite Enterprises [ITA No.110 of 2009 (Bombay High Court)], the learned CIT(A) categorically held that the disallowance made by the Assessing Officer under section 14A read with Rule 8D was unsustainable and accordingly deleted the same.
After hearing the rival submissions and carefully perusing the entire material available on record, we find that it is an undisputed and admitted factual position that the assessee has not earned any exempt income during the relevant previous year. This factual position stands
Once this fundamental factual premise is established, the legal position becomes absolutely clear and settled. The Hon’ble Jurisdictional Bombay High Court in Pr. CIT vs. Ballarpur Industries Limited (ITA No.51 of 2016, Bombay High Court) and CIT vs. Delite Enterprises [ITA No.110 of 2009 (Bombay High Court)] has categorically held that in the absence of exempt income, disallowance under section 14A cannot be made. This principle has been consistently followed by various High Courts and by the Tribunal in assessee’s own case for multiple assessment years.
It is further significant to note that in assessee’s own case, the Tribunal has consistently held that no disallowance under section 14A can be made in the absence of exempt income, and these decisions constitute binding precedent which must be followed in accordance with the principle of judicial discipline and consistency.
The reliance placed by the Assessing Officer on CBDT Circular No.5/2014 and the amendment brought by the Finance Act, 2022 is misplaced, as binding judicial precedents have clearly held that in the absence of exempt income, no disallowance under section 14A can be made,
Accordingly, respectfully following the binding precedents including the judgments of the Hon’ble Jurisdictional High Court and the consistent decisions of the Tribunal in assessee’s own case, and considering the admitted factual position that no exempt income has been earned during the relevant previous year, we hold that the disallowance of Rs.95,44,19,290/- made under section 14A read with Rule 8D and the corresponding addition made under section 115JB is unsustainable in law and has rightly been deleted by the learned CIT(A).
In the result, the appeal filed by the Revenue stands dismissed.
Order pronounced on 19th February, 2026.
Sd/- Sd/- (ARUN KHODPIA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 19/02/2026 KARUNA, sr.ps
(Asstt. Registrar) ITAT, Mumbai