Disallowance under Income Tax Act cannot be based on Presumptions of Earning Dividend Income in future: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that disallowance under the Income Tax Act, 1961 cannot be based on presumptions of earning future dividend income. This decision came in the case of Zodiac Ventures Ltd, a real estate and architectural services company, which had acquired shares to gain a controlling interest in a subsidiary, not to earn dividends. The Assessing Officer (AO) had disallowed expenses based on the assumption that the investment was made using borrowed funds with interest, potentially earning dividends in the future. The AO calculated a disallowance of Rs 50,81,159 under Section 14A, which was upheld by the Commissioner of Income Tax (Appeals).\r

Zodiac Ventures Ltd contested this, arguing that no dividend income was earned during the financial year 2016, and therefore, the disallowance under Section 14A was not applicable. The ITAT noted that the amendment to Section 14A by the Finance Act, 2022, cannot be applied retrospectively. Furthermore, it observed that the assessee had sufficient funds apart from borrowed ones for investment. Consequently, the ITAT concluded that disallowance under Section 14A was unwarranted in this case, and set aside the findings of the CIT (A), allowing the appeal by Zodiac Ventures Ltd.