IN THE INCOME TAX APPELLATE TRIBUNAL, ‘E’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER &

SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.7773/Mum/2025 (Assessment Year :2018-19 Elara Capital (India) Vs. The ACIT-Circle 6(2)(2), Private Limited Mumbai Tower 3, 21st Floor One International Centre Senapati Bapat Marg Elphinstone Road (W)

Mumbai- 400 013 PAN/GIR No.AABCE6487B (Appellant) .. (Respondent Assessee by Shri Milin Dattani a/w. Ms.

Nidhi Jain Revenue by Shri Hemanshu Joshi, Sr.

DR Date of Hearing 05/02/2026 Date of Pronouncement 10/02/2026 / O R D E R आदेश PER AMIT SHUKLA (J.M):

The present appeal has been filed by the assessee against the order dated 24.10.2025 passed by the National Faceless Appeal Centre, Delhi, arising out of the assessment framed under section 143(3) of the Income-tax Act, 1961 for the assessment year 2018-19.

2. The assessee is aggrieved only by the disallowance of ₹39,48,000/- made by the Assessing Officer under section 14A of the Act and sustained by the learned Commissioner (Appeals). It is an admitted and undisputed fact on record that during the year under consideration, the assessee had not earned or received any income which does not form part of total income under the Act. No dividend income or any other exempt income was reported in the return of income, and this factual position has not been controverted by the Revenue authorities at any stage of proceedings.

3. Despite the aforesaid admitted factual position, the Assessing Officer proceeded to invoke the provisions of section 14A read with Rule 8D and computed disallowance of ₹39,48,000/- by applying 1% of the annual average of monthly investments. The Assessing Officer has neither recorded any objective satisfaction as mandated under section 14A(2) nor demonstrated any proximate nexus between the alleged expenditure and any income not forming part of total income. The learned Commissioner (Appeals) confirmed the said disallowance primarily by placing reliance upon the amendment brought to section 14A by the Finance Act, 2022.

4. We have carefully considered the rival submissions, perused the material available on record, and examined the legal position governing the issue. The short but important question which arises for consideration is whether a disallowance under section 14A can be sustained in a year where admittedly no exempt income has been earned by the assessee.

5. The jurisprudence on this issue is now well settled. Section 14A is attracted only when there exists income which does not form part of total income under the Act. The existence of exempt income during the relevant previous year is a sine qua non for invoking the provisions of section 14A. In the absence of such income, there can be no occasion to disallow any expenditure allegedly incurred in relation thereto.

6. The Hon’ble Delhi High Court in PCIT v. Era Infrastructure (India) Ltd. (2022) 448 ITR 674 has comprehensively examined this issue and has categorically held that where no exempt income has been earned during the year, no disallowance under section 14A can be made. What is of particular relevance is that the Hon’ble High Court has also considered the amendment introduced by the Finance Act, 2022, whereby an Explanation was inserted to section 14A with effect from 01.04.2022, and has unequivocally held that the said amendment is prospective in nature and does not have retrospective operation. The Hon’ble High Court observed that the amendment seeks to alter the existing legal position and cannot be construed as declaratory or clarificatory. Applying the settled principles of statutory interpretation, it was held that the amendment would apply only from assessment year 2022-23 onwards and cannot be invoked to sustain disallowance for earlier years where the legal position stood settled in favour of the assessee.

7. The aforesaid ratio has been consistently followed in subsequent decisions. The Hon’ble Delhi High Court in PCIT v. Keti Construction Ltd. (2024) 4