ITAT Ahmedabad Upholds Relief To Adani Total Gas, Says No Exempt Income No Section 14A Disallowance

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) on 22 June reiterated that no disallowance can be made under Section 14A of the Income Tax Act where the taxpayer has not earned any exempt income during the relevant assessment year.

Vice President Dr. B.R.R. Kumar and Judicial Member Rahul Chaudhary dismissed the Revenue's appeal and upheld the deletion of a Rs. 2.38 crore disallowance made against Adani Total Gas Ltd. for Assessment Year 2020-21. The Bench held:

"It is an undisputed fact that assessee has not earned any exempt income. Hence, keeping in view the adage 'No exempt income-No disallowance' ... we find no infirmity in the order of the Ld. CIT(A)."

The dispute arose from the assessment proceedings for AY 2020-21. The Assessing Officer invoked Section 14A read with Rule 8D of the Income Tax Rules and disallowed Rs. 2.38 crore on the ground that the expenditure related to investments capable of yielding exempt income.

The Revenue contended that the disallowance had been computed in accordance with law after recording the requisite satisfaction under Section 14A.

Adani Total Gas Ltd., however, argued that it had not earned any exempt income during the relevant year and therefore Section 14A could not be invoked. The company relied on various judicial precedents, including decisions of the Gujarat High Court and the ruling in Chettinad Logistics Pvt. Ltd., which received affirmation from the Supreme Court.

Examining the record, the Tribunal noted that it was undisputed that the company had not earned any exempt income during the assessment year under consideration. It observed that courts have consistently held that in the absence of exempt income, no disallowance can be made under Section 14A.

The Bench also considered the Explanation inserted into Section 14A by the Finance Act, 2022, which permits disallowance even where no exempt income has been earned. However, it held that the amendment operates prospectively from Assessment Year 2022-23 and therefore could not govern AY 2020-21.

Relying on the settled legal position applicable to the assessment year in question, it found no error in the order of the Commissioner of Income Tax (Appeals) deleting the addition.

Accordingly, the ITAT dismissed the Revenue's appeal.