Disallowance under section 14A in absence of any exempt income- Finance Bill 2022 clarifies
Section 14A of the Income Tax Act, 1961 provides that no deduction of expenditure incurred by the assessee shall be allowed in respect of income which is exempt as per the provisions of the Act. However, the above provision has been subjected to litigation over the years on the issue whether disallowance u/s 14A shall be valid where no exempt income has accrued, arisen, or received by the assessee during an assessment year.
CBDT has issued a Circular No. 5/2014, dated 11-02-2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where the taxpayer in a particular year has not earned any exempt income. Still, some courts have taken a view that if there is no exempt income during a year, no disallowance u/s 14A can be made for that year.
Refer to the following judgments:
(i) Cheminvest Ltd. vs. CIT [2015] 61 taxmann.com 118/234 Taxman 761 (Delhi)
(ii) Principal CIT vs. Kohinoor Project (P.) Ltd. [2020] 121 taxmann.com 177 (Bom.)
Therefore, in order to make the intention of the legislation clear and to remove misinterpretation, the Finance Bill 2022 proposes to insert an Explanation to Section 14A of the Income Tax Act with overriding effect and also makes an amendment in section sub-section (1) of section 14A as follows:
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Old Provision |
New/ Amended Provision |
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14A(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. |
14A(1) Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. |
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Analysis: Finance Bill 2022 proposes to amend sub-section (1) of section 14A, so as to include a non-obstante clause in respect of other provisions of the Income Tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary in this Act.
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No Existing Explanation in section 14A |
Newly inserted Explanation: “For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.” |
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Analysis:
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About Author: The author of this article is CA Naveen Goyal. He is having an experience of more than 15 years in the field of Direct Taxation as well as Indirect Taxation. You can post him for further queries: ca.naveen80@gmail.com
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