Facts of the Case

The present appeal was filed by the Revenue against the order of the Income Tax Appellate Tribunal (ITAT) dated 17.02.2021. The core issue pertained to disallowance of ₹3,14,71,557/- made by the Assessing Officer under Section 14A read with Rule 8D.

The Commissioner of Income Tax (Appeals) [CIT(A)] recorded a finding that:

  • The assessee had made investments in subsidiary/associated companies for strategic purposes, and
  • The assessee did not earn any exempt dividend income during the relevant assessment year.

The ITAT upheld these findings and ruled in favour of the assessee.

 Issues Involved

  1. Whether disallowance under Section 14A can be made when no exempt income is earned by the assessee?
  2. Whether investments made for strategic purposes attract disallowance under Section 14A read with Rule 8D?

 Petitioner’s (Revenue’s) Arguments

  • The Revenue contended that the Assessing Officer had rightly invoked Section 14A read with Rule 8D to disallow expenditure related to investments.
  • It was argued that such disallowance applies irrespective of whether exempt income is actually earned.

 Respondent’s (Assessee’s) Arguments

  • The assessee submitted that:
    • No exempt income (dividend) was earned during the relevant year.
    • Investments were made for strategic business purposes, not for earning exempt income.
  • Therefore, Section 14A could not be invoked.

 Court’s Findings / Order

  • The issue is squarely covered against the Revenue by the decision in Cheminvest Ltd. vs CIT (378 ITR 33).
  • It reaffirmed that no disallowance under Section 14A can be made where no exempt income is earned.
  • The Court also referred to:
    • PCIT vs MMTC Ltd. (ITA 505/2022)
    • PCIT vs Era Infrastructure (India) Ltd.
    • PCIT vs IL & FS Energy Development Company Ltd.
  • It was noted that the amendment to Section 14A by Finance Act, 2022 is prospective and not retrospective.
  • The Court concluded that:

No substantial question of law arises for consideration.

  • Accordingly, the appeal filed by the Revenue was dismissed.

Important Clarifications

  • Section 14A disallowance cannot be invoked in absence of exempt income.
  • Investments made for strategic purposes do not automatically trigger disallowance.
  • Amendment under Finance Act, 2022 to Section 14A is not retrospective.
  • Revenue retains liberty to revive the matter if pending SLP in related cases succeeds.

Sections Involved

  • Section 14A – Expenditure incurred in relation to exempt income
  • Rule 8D – Method for determining disallowance

Related Case Laws

  • Cheminvest Ltd. vs CIT (2015) 378 ITR 33
  • PCIT vs IL & FS Energy Development Company Ltd. (2017 SCC OnLine Del 9893)
  • PCIT vs Era Infrastructure (India) Ltd.
  • PCIT vs MMTC Ltd. (ITA 505/2022) 

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/59007022023ITA712023_183824.pdf        

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