ITAT Dismisses Tax Department’s Appeal Against Adani Total Gas, Reaffirms ‘No Exempt Income, No Section 14A Disallowance’ Principle

June 22, 2026 : In a significant ruling on the scope of Section 14A of the Income-tax Act, 1961, the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has dismissed the Income Tax Department’s appeal against Adani Total Gas Limited, holding that no disallowance can be made under Section 14A where the assessee has not earned any exempt income during the relevant assessment year. The decision reinforces a well-established judicial principle that expenditure cannot be disallowed merely because investments exist if those investments have not generated tax-exempt income.

The appeal was filed by the Deputy Commissioner of Income Tax challenging the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), which had deleted a disallowance of ₹2.38 crore made under Section 14A read with Rule 8D of the Income-tax Rules, 1962. The dispute pertained to Assessment Year 2020-21.

According to the case records, Adani Total Gas Limited, engaged in the business of trading and transportation of natural gas as well as manufacturing compressed natural gas (CNG), had filed its income tax return declaring taxable income under the normal provisions of the Income-tax Act. During scrutiny assessment under Sections 143(3) read with 144B, the Assessing Officer invoked Section 14A and Rule 8D to disallow expenditure allegedly attributable to exempt income, resulting in an addition of ₹2.38 crore.

The Revenue argued before the Tribunal that the Assessing Officer had correctly applied Section 14A after recording proper satisfaction and computing the disallowance in accordance with the statutory provisions and prevailing judicial precedents. It contended that the Commissioner (Appeals) erred in deleting the addition.

Appearing for the assessee, counsel submitted that the company had not earned any exempt income during the relevant financial year. Therefore, the very foundation for invoking Section 14A was absent. The assessee relied upon several judicial precedents, including decisions of the Gujarat High Court, the Supreme Court, and earlier ITAT rulings involving similar issues. It was also argued that although the Finance Act, 2022 inserted an Explanation to Section 14A permitting disallowance even in the absence of exempt income, the amendment is prospective and applies only from Assessment Year 2022-23 onwards.

The Tribunal accepted the assessee’s submissions and noted that the controversy was no longer res integra. Referring to its earlier coordinate bench decisions and judgments of higher courts, the Bench observed that where an assessee has not earned any exempt income during the relevant assessment year, no disallowance under Section 14A can be sustained.

The Tribunal relied on the Supreme Court-approved principle laid down in Chettinad Logistics Pvt. Ltd., the Gujarat High Court’s rulings in Corrtech Energy (P.) Ltd. and PCIT v. Adani Wilmar Ltd., as well as the Gauhati High Court’s judgment in Williamson Financial Services Ltd., which held that the Explanation inserted by the Finance Act, 2022 is prospective and cannot be applied retrospectively to earlier assessment years.

Emphasising the settled legal position, the Bench observed, “No exempt income-No disallowance.” It further held that since the assessee admittedly had not earned any exempt income during Assessment Year 2020-21, there was no legal infirmity in the Commissioner (Appeals)’ decision deleting the disallowance made under Section 14A.

Accordingly, the Tribunal dismissed the Revenue’s appeal and upheld the appellate order in favour of Adani Total Gas Limited.

The judgment is significant for taxpayers whose assessments relate to periods prior to Assessment Year 2022-23. It reiterates that the amended Explanation to Section 14A introduced by the Finance Act, 2022 cannot be retrospectively invoked to justify disallowance where no exempt income has actually been earned. The ruling also provides clarity to companies holding investments that do not generate tax-free income during a particular financial year, reducing the scope for arbitrary additions under Section 14A.

The case also reflects judicial consistency in interpreting Section 14A in light of binding precedents, ensuring that tax authorities cannot mechanically invoke Rule 8D in the absence of exempt income for assessment years governed by the unamended law.

Case Reference : Deputy Commissioner of Income Tax v. Adani Total Gas Limited