1. Clarification in respect of Disallowance under Section 14A in absence of any Exempt Income during an Assessment Year
[Explanation to Section 14A inserted by the Finance Bill, 2022 w.e.f. 1-4-2022 and Amendment of Section 14A(1) w.e.f. AY 2022-23]
The existing section 14A(1) provides that 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.
Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can he made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year.
CBDT issued 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 taxpayer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year. an assessee incurs an expense of Rs.1 lakh to earn non-exempt income of Rs. 1.5 lakh and also incurs an expense of Rs. 20.000 to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued / received during the year, it amounts to holding that Rs. 20,000/- would be allowed as deduction against non-exempt income of Rs. 1.5 lakh even though this expense was not incurred wholly and exclusively for the purpose of earning non-exempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act.
In order to make the intention of the legislation clear and to make it free from any misinterpretation, the following amendments have been made by the Finance Bill. 2022 w.e.f. AY 2022.23
(i) Explanation to Section 14A inserted w.e.f. AY 2022-23
To clarify the above issue, the Finance Hill, 2022 has inserted the following Explanation to section 14A
“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 tinder 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.”
(ii) Non-obstante clause Inserted under section 14A(1)
The Bill has amended section 14A(1) 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 contained in this Act.