ACIT., CIRCLE-5(1), HYDERABAD vs. ENGENRIN HYDRO POWER LIMITED, HYDERABAD

Facts

The assessee company made substantial investments in its subsidiaries, and the Revenue disallowed expenditure relatable to these investments under Section 14A of the Income Tax Act, 1961, even though the assessee did not earn any exempt income during the assessment years in question. The Assessing Officer (AO) invoked Section 14A read with Rule 8D to disallow expenditure, including net interest expenditure.

Held

The Tribunal held that Section 14A of the Income Tax Act cannot be invoked to disallow expenditure when no exempt income has been earned by the assessee in the relevant assessment year. The recent amendment to Section 14A by the Finance Act, 2022, which introduced an Explanation to clarify that the section applies even in the absence of exempt income, is effective from April 1, 2022, and cannot be applied retrospectively to earlier assessment years. The disallowance made by the AO was therefore not sustainable.

Key Issues

Whether disallowance of expenditure under Section 14A of the Income Tax Act is permissible when the assessee has not earned any exempt income in the relevant assessment year, particularly in light of the amendment by the Finance Act, 2022.