I earned no exempt income at all this year. Can the AO still disallow under s.14A?
No, for assessment years up to 2021-22. Section 14A speaks of expenditure in relation to income which does not form part of total income, which presupposes income actually received or receivable in that year; it cannot be applied to notional exempt income that may arise later.
Decided by the High Court (Delhi High Court (Dr. S. Muralidhar and Vibhu Bakhru JJ)) on 2015-09-02, reported as [2015] 61 taxmann.com 118 (Delhi) / [2015] 234 Taxman 761 (Delhi) / (2015) 378 ITR 33 (Delhi) / [2015] 281 CTR 447 (Delhi); IT Appeal No. 749 of 2014. It bears on section 14A, section Rule 8D of the Income Tax Act 1961, in Deductions & Disallowances matters.
It is the primary authority against a Rule 8D computation run mechanically on the investment figure in a year with nil dividend. It also disposes of the Revenue's reliance on Rajendra Prasad Moody, which was held to arise on differently worded language. For assessment year 2022-23 onwards the statutory Explanation displaces this, so the case is now an old-years argument.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was engaged in the business of making investments in shares and in accepting and granting loans. For assessment year 2004-05 it filed a return declaring a loss of Rs. 13,84,086. The case was picked up for scrutiny and the Assessing Officer disallowed Rs. 97,87,570 out of the expenditure claimed, applying s.14A, although the assessee had earned no exempt income in that year; the holding in question was a strategic investment in the shares of Max India Ltd., and the genuineness of the expenditure was never in doubt. A Special Bench of the Tribunal in the assessee's own case, Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB), had held that a disallowance under s.14A could be made even where no exempt income was earned. The Tribunal, by order of 4 January 2013 in ITA No. 87/Del/2008, referred to Maxopp Investment and remanded the matter to the Assessing Officer for fresh consideration. The assessee appealed under s.260A, and the question admitted was whether a disallowance under s.14A can be made in a year in which no exempt income has been earned or received.
The question was answered in the assessee's favour: the expression 'does not form part of the total income' in s.14A envisages an actual receipt of income which is not includible in total income during the relevant previous year for the purpose of disallowing expenditure incurred in relation to that income, so s.14A does not apply where no exempt income is received or receivable in that year (para 23). The Tribunal's order was set aside and the appeal allowed (para 24), and the Special Bench decision in the assessee's own case was reversed. The Court expressly reserved one point: it said it should not be understood to have expressed any opinion on whether, for the assessment year in question, the interest expenditure would be allowable as business expenditure under s.36(1)(iii) (para 24). So the disallowance under s.14A fell, but the allowability of the interest on its own footing was left open.
The Court decided the case on the authority of CIT v. Holcim India (P.) Ltd., taking with it the admitted facts that the investment was strategic, that no exempt income was earned in the year and that the genuineness of the expenditure was not in doubt (para 19). It then dealt with the Supreme Court decision on which the Special Bench had relied. Rajendra Prasad Moody was decided under s.57(iii), where the words are 'for the purpose of making or earning such income', whereas s.14A uses 'in relation to income which does not form part of the total income'; the Court held that Moody cannot be used in reverse to contend that expenditure may be disallowed under s.14A even though no income has been received (paras 20 to 21). Maxopp Investment, on which the Tribunal had remanded, was distinguished: there the question was the disallowance of expenditure on shares of operating companies held for a controlling interest, and dividend had admittedly been earned on those investments, so it was not a case like this one where no exempt income arose in the year, and the decision was therefore irrelevant to the question here (para 22). On that basis the Court framed its answer at para 23 and set the Tribunal's order aside.
In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
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Handle my notice → Ask a CA on WhatsAppNo, for assessment years up to 2021-22. Section 14A speaks of expenditure in relation to income which does not form part of total income, which presupposes income actually received or receivable in that year; it cannot be applied to notional exempt income that may arise later. This was decided by the High Court (Delhi High Court (Dr. S. Muralidhar and Vibhu Bakhru JJ)) and bears on section 14A, section Rule 8D of the Income Tax Act 1961. It is reported as [2015] 61 taxmann.com 118 (Delhi) / [2015] 234 Taxman 761 (Delhi) / (2015) 378 ITR 33 (Delhi) / [2015] 281 CTR 447 (Delhi); IT Appeal No. 749 of 2014. It is the primary authority against a Rule 8D computation run mechanically on the investment figure in a year with nil dividend. It also disposes of the Revenue's reliance on Rajendra Prasad Moody, which was held to arise on differently worded language. For assessment year 2022-23 onwards the statutory Explanation displaces this, so the case is now an old-years argument. If it applies to you, the first step is this: State the exempt income actually received during the year, with the figure, before arguing anything else.
The assessee was engaged in the business of making investments in shares and in accepting and granting loans. For assessment year 2004-05 it filed a return declaring a loss of Rs. 13,84,086. The case was picked up for scrutiny and the Assessing Officer disallowed Rs. 97,87,570 out of the expenditure claimed, applying s.14A, although the assessee had earned no exempt income in that year; the holding in question was a strategic investment in the shares of Max India Ltd., and the genuineness of the expenditure was never in doubt. A Special Bench of the Tribunal in the assessee's own case, Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB), had held that a disallowance under s.14A could be made even where no exempt income was earned. The Tribunal, by order of 4 January 2013 in ITA No. 87/Del/2008, referred to Maxopp Investment and remanded the matter to the Assessing Officer for fresh consideration. The assessee appealed under s.260A, and the question admitted was whether a disallowance under s.14A can be made in a year in which no exempt income has been earned or received. The matter was decided on 2015-09-02 by the High Court (Delhi High Court (Dr. S. Muralidhar and Vibhu Bakhru JJ)). On those facts the High Court held as follows. The question was answered in the assessee's favour: the expression 'does not form part of the total income' in s.14A envisages an actual receipt of income which is not includible in total income during the relevant previous year for the purpose of disallowing expenditure incurred in relation to that income, so s.14A does not apply where no exempt income is received or receivable in that year (para 23). The Tribunal's order was set aside and the appeal allowed (para 24), and the Special Bench decision in the assessee's own case was reversed. The Court expressly reserved one point: it said it should not be understood to have expressed any opinion on whether, for the assessment year in question, the interest expenditure would be allowable as business expenditure under s.36(1)(iii) (para 24). So the disallowance under s.14A fell, but the allowability of the interest on its own footing was left open.
The Court decided the case on the authority of CIT v. Holcim India (P.) Ltd., taking with it the admitted facts that the investment was strategic, that no exempt income was earned in the year and that the genuineness of the expenditure was not in doubt (para 19). It then dealt with the Supreme Court decision on which the Special Bench had relied. Rajendra Prasad Moody was decided under s.57(iii), where the words are 'for the purpose of making or earning such income', whereas s.14A uses 'in relation to income which does not form part of the total income'; the Court held that Moody cannot be used in reverse to contend that expenditure may be disallowed under s.14A even though no income has been received (paras 20 to 21). Maxopp Investment, on which the Tribunal had remanded, was distinguished: there the question was the disallowance of expenditure on shares of operating companies held for a controlling interest, and dividend had admittedly been earned on those investments, so it was not a case like this one where no exempt income arose in the year, and the decision was therefore irrelevant to the question here (para 22). On that basis the Court framed its answer at para 23 and set the Tribunal's order aside. In the words reproduced by the source cited on this page: "In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year." The decision followed or applied CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28 (Delhi); Distinguished: Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 / [2011] 203 Taxman 364 / 15 taxmann.com 390 (Delhi); Held inapplicable: CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC); Reversed: Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB).
It was decided by the High Court on 2015-09-02 and is reported as [2015] 61 taxmann.com 118 (Delhi) / [2015] 234 Taxman 761 (Delhi) / (2015) 378 ITR 33 (Delhi) / [2015] 281 CTR 447 (Delhi); IT Appeal No. 749 of 2014. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 14A, section Rule 8D, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the assessee's favour: the expression 'does not form part of the total income' in s.14A envisages an actual receipt of income which is not includible in total income during the relevant previous year for the purpose of disallowing expenditure incurred in relation to that income, so s.14A does not apply where no exempt income is received or receivable in that year (para 23). The Tribunal's order was set aside and the appeal allowed (para 24), and the Special Bench decision in the assessee's own case was reversed. The Court expressly reserved one point: it said it should not be understood to have expressed any opinion on whether, for the assessment year in question, the interest expenditure would be allowable as business expenditure under s.36(1)(iii) (para 24). So the disallowance under s.14A fell, but the allowability of the interest on its own footing was left open. It arises in Deductions & Disallowances matters, on section 14A, section Rule 8D of the Income Tax Act 1961, and was decided by Delhi High Court (Dr. S. Muralidhar and Vibhu Bakhru JJ). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the assessment year in the notice first, because the answer changes from assessment year 2022-23. Where the AO applies Rule 8D on capacity to earn exempt income, ask him in writing to identify the exempt income received in the year under assessment. Do not rely on this alone where the department invokes the later Explanation for an earlier year; that is a separate argument.
Superseded by amendment. Superseded by amendment — prospectively, and only on the 'no exempt income in the year, therefore no s.14A disallowance' proposition. For assessment years up to 2021-22 the proposition stands and this judgment is still the authority for it, and the rest of the reasoning is untouched by the amendment: in particular the holding that Rajendra Prasad Moody, decided on the different words of s.57(iii), cannot be run in reverse into s.14A. From assessment year 2022-23 it does not answer the point, because the Finance Act 2022 inserted an Explanation in s.14A. The enacted words were read on 8 September 2026 from the department's own current page for the section, incometaxindia.gov.in/w/section-14a, which prints the Explanation as: '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.' The same page opens sub-section (1) with 'Notwithstanding anything to the contrary contained in this Act'. Because the Explanation says the section 'shall apply and shall be deemed to have always applied', the department reads it as retrospective and applies it to years before 2022-23; that reading rests on the enacted language and is not fanciful. The High Courts located have very largely gone the other way and held the Explanation prospective from assessment year 2022-23: the Delhi High Court in Pr. CIT v. Era Infrastructure (India) Ltd (20 July 2022) and again in PCIT v. Alchemist Ltd / PCIT v. Uno Minda Ltd (7 August 2024), the Madhya Pradesh High Court in PCIT v. Keti Construction Ltd (29 April 2024), and the Gauhati High Court in the Williamson Financial Services group (2024). No High Court decision holding the Explanation retrospective was located, and no Supreme Court decision on the point was traced. The divergence is therefore between the department and the High Courts, not between one High Court and another: that is why this entry is labelled 'superseded by amendment' and not 'high courts differ', which is the label for a conflict among High Courts and there is no such conflict to record here. The companion entry for Pr. CIT v. IL & FS Energy Development Company Ltd, which decides the same proposition and additionally answers CBDT Circular No. 5/2014 on it, carries the same label for the same reasons. WHAT WAS AND WAS NOT RE-VERIFIED: the enacted text of the Explanation was verified today from the current departmental page named above. The earlier version of this note was written from a commercial publisher's write-up which has since been removed as a source, and this judgment's own reasoning, and the Era Infrastructure decision that follows it, have still not been re-read against the judgments themselves. The report of this judgment carries no citator banner, so no special leave petition against Cheminvest itself is recorded, though that is not proof that none was filed. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read this together with the Era Infrastructure entry, which is what answers the department when it applies the 2022 Explanation to an old year — you generally need both, and Era Infrastructure is also the decision that expressly follows this one. The judgment has now been read in full. Three things it settles. The respondent is the Commissioner of Income-tax-IV, and the appeal is IT Appeal No. 749 of 2014 against a Tribunal order of 4 January 2013 in ITA No. 87/Del/2008 for assessment year 2004-05; the amount disallowed was Rs. 97,87,570 out of expenditure claimed against a returned loss of Rs. 13,84,086. The reasoning rests on Holcim India, with Rajendra Prasad Moody held inapplicable because it construes s.57(iii) and its language cannot be reversed into s.14A, and Maxopp Investment distinguished because dividend had been earned there. And the Court reserved a point that is easy to miss: at para 24 it said it was expressing no opinion on whether the interest expenditure would be allowable as business expenditure under s.36(1)(iii) for that year, so this decision removes the s.14A disallowance without deciding that the expenditure is deductible. The report carries no citator banner, so no special leave petition against Cheminvest itself is recorded — but absence of a banner is not proof that none was filed, so do not describe it as unchallenged. The judgment as printed contains an obvious slip in the key sentence at para 23, reading 'in Section 14A of the envisages' where the word 'Act' is missing; quote the following sentence rather than that one. It does not decide whether the interest expenditure was allowable under s.36(1)(iii), which it expressly left open. No special leave petition against this decision is recorded on the report, but absence of a citator banner does not establish that none was filed. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the assessee's favour: the expression 'does not form part of the total income' in s.14A envisages an actual receipt of income which is not includible in total income during the relevant previous year for the purpose of disallowing expenditure incurred in relation to that income, so s.14A does not apply where no exempt income is received or receivable in that year (para 23). The Tribunal's order was set aside and the appeal allowed (para 24), and the Special Bench decision in the assessee's own case was reversed. The Court expressly reserved one point: it said it should not be understood to have expressed any opinion on whether, for the assessment year in question, the interest expenditure would be allowable as business expenditure under s.36(1)(iii) (para 24). So the disallowance under s.14A fell, but the allowability of the interest on its own footing was left open.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The officer disallowed your claim. Does a disallowance automatically bring penalty with it?
Shares held for control, or as stock-in-trade. Does s.14A still bite?
Your own funds exceed the tax-free investments. Can interest still be disallowed proportionately?
The AO applied the 2022 Explanation to s.14A to an old year. Can he do that?