Amendments to Section 14A vide Finance Act, 2022 – Clarificatory or Ambiguity?

Madhvi Desai – [2022] 137 taxmann.com 128 (Article)

Section 14A had been introduced vide Finance Act, 2001 with retrospective effect from AY 1962-63.

The basic premise of Section14A is to discourage assessee to claim expenditure against such income which is not part of the total income. Memorandum explaining introduction of Section14A gives reference to principle of taxability of net income, according to which only net income i.e. Gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent of they are related to earning taxable income.

Over the years, Section14A has become one of the hot topics of the litigation. There is plethora of judicial precedents on the subject matter. Still the matter remains unsettled.

CBDT vide Circular No.5/2014 dated 11.02.2014 has clarified to provide for disallowance of expenditure even where taxpayer in a particular year has no corresponding exempt income.

However, over the years, courts used to take rational view in this matter. According to judiciary, when there is no exempt income in a particular year, no disallowance is warranted. To nullify the effects of such decisions, revenue has once again used the weapon of amendments. This is one more classic instance of stringent attitude of the revenue!

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