Rs. 48.37 Crore Investments Triggered Rs. 43.42 Lakh Section 14A Disallowance; ITAT Deletes Addition Due to Absence of Exempt Income

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that no disallowance under Section 14A read with Rule 8D can be made where the assessee has not earned any exempt income during the relevant assessment year.

The assessee, Shankara Building Products Limited, engaged in the retail business of home improvement and building products and filed its return for AY 2020-21 declaring income of Rs 34.08 crore. During scrutiny, the Assessing Officer noticed that the company had investments of Rs 48.37 crore in the unquoted equity shares of its subsidiary companies and had also claimed finance costs of Rs 31.69 crore. On this basis, the AO invoked Section 14A and made a disallowance of Rs 43.42 lakh under Rule 8D, despite the assessee’s contention that it had not earned any exempt income during the year. The disallowance was upheld by the CIT(A), prompting the assessee to approach the Tribunal.

The ITAT observed that it was an undisputed fact that the assessee had not earned any exempt income and had not claimed any exemption under Section 10(34) while filing its return. Relying on the Delhi High Court’s decision in Cheminvest Ltd. v. CIT and the Bombay High Court’s ruling in PCIT v. Kohinoor Project Pvt. Ltd., the Tribunal reiterated that Section 14A cannot be invoked where no exempt income is received or receivable during the relevant previous year.

The Tribunal also examined the amendment introduced by the Finance Act, 2022, which inserted a non-obstante clause and an Explanation in Section 14A, clarifying that the provision would apply even where no exempt income has accrued or arisen. Referring to the Delhi High Court’s judgement in PCIT v. Era Infrastructure (India) Ltd, the Tribunal noted that the amendment is prospective in nature and applicable only from AY 2022-23 onwards.

Since the year under consideration was AY 2020-21 and the assessee had not earned any exempt income, the Tribunal held that the disallowance made under Section 14A read with Rule 8D was wholly unsustainable and directed its deletion.

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