Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 25.08.2022 passed by the Income Tax Appellate Tribunal, whereby the Tribunal allowed the assessee’s appeal and dismissed the Revenue’s appeal arising from the order of the CIT(A)-24 dated 08.06.2025.

For Assessment Year 2011–12, the assessee earned dividend income of ₹50,000, disclosed under the head “Other Income”. The Assessing Officer invoked Section 14A and made a disallowance of ₹14,12,51,908. The CIT(A) restricted the disallowance to 0.5% of the average investments. Both the Revenue and the assessee filed cross-appeals before the ITAT. The Tribunal held that the disallowance under Section 14A could not exceed the exempt income actually earned and restricted the disallowance to ₹50,000.

Issues Involved

Whether disallowance under Section 14A can exceed the exempt income earned during the relevant assessment year, whether the amendment introduced by the Finance Act, 2022 to Section 14A is retrospective or prospective, and whether any substantial question of law arose from the Tribunal’s order.

Appellant’s Arguments

The Revenue contended that Section 14A applies even where exempt income has not accrued or arisen during the year and relied on CBDT Circular No. 5/2014 and judicial precedents. It was argued that the amendment introduced by the Finance Act, 2022 was clarificatory in nature and should be applied retrospectively to validate the disallowance made by the Assessing Officer.

Respondent’s Arguments

The assessee submitted that it is well-settled that disallowance under Section 14A cannot exceed the exempt income actually earned during the year. It was further argued that the Finance Act, 2022 amendment has been judicially held to be prospective and therefore cannot be applied to Assessment Year 2011–12. Reliance was placed on the Delhi High Court decisions in Joint Investments Pvt. Ltd. v. CIT and PCIT (Central) v. Era Infrastructure (India) Ltd.

Court Order / Findings

The Delhi High Court examined the Tribunal’s order and noted that the Tribunal had correctly relied upon the binding precedent in Joint Investments Pvt. Ltd. v. Commissioner of Income-tax, wherein it was held that disallowance under Section 14A must be restricted to the extent of exempt income earned.

The Court also recorded the fair concession of the Revenue that the amendment introduced by the Finance Act, 2022 had already been declared prospective by the Delhi High Court in PCIT (Central) v. Era Infrastructure (India) Ltd. Since the appeal related to Assessment Year 2011–12, the amendment was held to be inapplicable.

The Court concluded that no substantial question of law arose for consideration.

Important Clarification

The Court clarified that for assessment years prior to the Finance Act, 2022 amendment, disallowance under Section 14A cannot exceed the exempt income actually earned during the year, and the 2022 amendment cannot be applied retrospectively.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the ITAT’s order restricting disallowance under Section 14A to ₹50,000, being the exempt income earned during Assessment Year 2011–12, and held that the amendment introduced by the Finance Act, 2022 is prospective and inapplicable to the year under consideration.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769504063_THEPR.COMMISSIONEROFINCOMETAXCENTRAL1VsR.J.CORP.LTD..pdf

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