Introduction
The High Court of Madhya Pradesh (‘HC’) has clarified the prospective applicability of the amendment to s.14A of the Income-tax Act, 1961 (‘Act’). This clarification was made in the case of the Principal Commissioner of Income-tax v. Keti Construction Ltd.[i] The HC upheld the order passed by the Income Tax Appellate Tribunal (‘ITAT’), which was in favour of Keti Construction Ltd.(‘Assessee’), and deleted the additions made by the assessing officer (‘AO’) for A.Y. 2013-14.
Brief Facts
The was in the construction business. They filed their return of income (‘ROI’) for the assessment year (‘A.Y.’) 2013-14, declaring a total income (‘TI’) of approximately Rs. 1.40 crore. The AO then scrutinized the ROI under s.143(3) of the Act.
Subsequent to the aforementioned scrutiny, the AO determined the Assessee's TI to be approximately Rs. 8.20 crores. The AO issued a notice to the Assessee in the said regard and sought certain documents relevant to the purpose of the assessment from the Assessee. However, the Assessee failed to provide the same.
Consequently, a search was conducted at the premises of the Assessee, which revealed that the Assessee had inflated its expenses and suppressed the profits. The Assessee subsequently submitted the relevant documents, the AO passed the assessment order, and certain additions were made.
The Assessee appealed against the AO's order and contended that the disallowance of approximately Rs 3.70 crores was incorrect and made without considering the documents submitted by the Assessee. The Commissioner of Income Tax Appeals (‘CIT(A)’) allowed the appeal and deleted the additions made by the AO while further observing that the AO made the disallowance under s.14A of the Act without appreciating that the Assessee claimed no exempt income.
The order passed by CIT(A) was further reaffirmed and upheld by the ITAT. Thus, aggrieved by the ITAT's decision, the revenue filed the present appeal.
Held
In deciding the appeal in favour of the Assessee, the HC made the following observations:
The AO had failed to consider the documents submitted during the assessment proceedings. Consequently, it upheld the CIT(A)'s findings as valid and saw no reason to interfere with the deletion of the disallowance.
Further, regarding the amendment to s.14A of the Act, the HC ruled that the said amendment would be made applicable prospectively from A.Y. 2022-23, and as the assessment in the present case was pertaining to the year 2013-14, the amendment to s. 14(A) of the Act would not be made applicable.
While passing the aforementioned order, the HC relied upon the observations made by the Delhi High Court in Chivenwest v. CIT[ii], wherein it was held that s.14(A) disallowance does not apply if the Assessee receives no exempt income.
Our Analysis
In this case, the dismissal of the Appellant’s appeal sets a crucial precedent for taxpayers and the tax authorities. It reinforces the principle of evidence-based assessments and clarifies the application of s.14(A) of the Act.
S. 14(A) of the Act disallows the deduction of expenses incurred in relation to income exempt from tax when computing the total taxable income. This section ensures taxpayers cannot reduce their taxable income by claiming expenses related to earning exempt income, such as tax-free dividends or interest. If AO is unsatisfied with the claim regarding such expenses, they are empowered to determine the taxable income using a prescribed method. This provision applies even if a taxpayer claims no expenses were incurred or the exempt income was not actually received during the relevant year.
In 2022, the Parliament enacted a significant amendment to s.14A of the Act, incorporating a non-obstante clause and an explanatory provision to state that the section applies even if the exempt income is absent during the relevant year. This amendment became effective on 01.04.2022 and does not apply retrospectively.
In the present case, the A.Y. in question was A.Y. 2013-14. Hence, the amendment is not pertinent to the circumstances of the case and did not impact the proceedings. HC’s decision was grounded in a thorough review of s. 14(A) of the Act and the facts of the case, ultimately finding no justification for intervention.
End Notes
[i] [2024] 162 taxmann.com 278 (Madhya Pradesh
[ii] (1954) 26 ITR 775 SC
Authored by Shreya Manchanda, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.