Facts of the Case

The assessee, Hindustan Power Projects Pvt. Ltd., filed appeals before the Income Tax Appellate Tribunal (ITAT), Delhi Bench against revisionary orders passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961 for Assessment Years 2018-19 and 2019-20.

The Assessing Officer (AO) had originally completed assessments under Section 153A without making any disallowance under Section 14A read with Rule 8D, as the assessee had not earned any exempt income during the relevant years.

Subsequently, the Pr. CIT invoked Section 263, holding that the assessment orders were erroneous and prejudicial to the interests of the Revenue for failure to consider disallowance under Section 14A.

Issues Involved

  1. Whether disallowance under Section 14A read with Rule 8D can be made when no exempt income is earned during the relevant assessment year.
  2. Whether the assessment order can be considered erroneous and prejudicial to the interests of the Revenue under Section 263 in such circumstances

Petitioner’s Arguments (Assessee)


  • The assessee contended that no exempt income or dividend income was earned during the relevant assessment years.
  • It was submitted that:
    • No deduction under Chapter VI-A or Section 10 was claimed.
    • Therefore, Section 14A was not applicable.
  • Reliance was placed on jurisdictional High Court rulings:
    • PCIT vs IL & FS Energy Development Company Ltd. (399 ITR 483)
    • PCIT vs Era Infrastructure (India) Ltd. (444 ITR 674)
    • PCIT vs All Chemist Ltd. (167 taxmann.com 284)
  • It was argued that:
    • The AO had duly examined the issue during assessment proceedings.
    • Hence, the order was neither erroneous nor prejudicial.

Respondent’s Arguments (Revenue)


  • The Revenue supported the order of the Pr. CIT.
  • It was argued that:
    • The AO failed to examine the applicability of Section 14A properly.
    • Disallowance under Section 14A should be made even if no exempt income is earned, based on certain judicial precedents (non-jurisdictional High Courts).

Court Order / Findings


  • The assessee did not earn any exempt income during the relevant assessment years.
  • The AO had:
    • Issued notices under Section 142(1)
    • Examined details regarding deductions and exempt income
    • Accepted the assessee’s explanation
  • The Tribunal observed:
    • Jurisdictional High Court decisions clearly hold that no disallowance under Section 14A can be made in absence of exempt income.
    • The Pr. CIT ignored binding jurisdictional precedents and relied on non-jurisdictional rulings.
  • It was held that:
    • The twin conditions of Section 263 (i.e., erroneous and prejudicial to Revenue) were not satisfied.
    • Therefore, invocation of Section 263 was invalid.

Important Clarification


  • Section 14A disallowance cannot be made when no exempt income is earned, as per binding jurisdictional High Court rulings.
  • For invoking Section 263:
    • Both conditions must be satisfied:
      1. Order is erroneous
      2. Order is prejudicial to Revenue
  • Mere difference of opinion or reliance on non-jurisdictional rulings does not justify revision.

Sections Involved

  • Section 14A – Expenditure incurred in relation to exempt income
  • Rule 8D – Method for determining disallowance
  • Section 263 – Revision of orders prejudicial to Revenue
  • Section 153A – Assessment in case of search
  • Section 142(1) – Inquiry before assessment

 Link to download the order - https://itat.gov.in/public/files/upload/1735637294-zUwTxd-1-TO.pdf


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