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

Facts

The Revenue filed appeals against the orders of the CIT(A) pertaining to assessment years 2016-17 to 2018-19. The core issue revolved around the disallowance of expenditure under Section 14A of the Income Tax Act, 1961, read with Rule 8D, for investments made in subsidiaries. The assessee contended that no exempt income was earned during the relevant assessment years, hence Section 14A could not be invoked.

Held

The Tribunal held that Section 14A of the Income Tax Act cannot be invoked to disallow expenditure relatable to exempt income if no such income has been earned by the assessee in the relevant assessment year. This principle was upheld by various judicial pronouncements, including those from the Supreme Court. The subsequent amendment to Section 14A by the Finance Act, 2022, with an explanatory clause, was held to be effective from April 1, 2022, and not applicable retrospectively to earlier assessment years.

Key Issues

Whether disallowance of expenditure under Section 14A of the Income Tax Act is permissible when no exempt income has been earned by the assessee in the relevant assessment year, and whether the amendment by Finance Act, 2022 is retrospective.