Facts of the Case

  • The Revenue filed an appeal challenging the ITAT order dated 16 July 2021 for AY 2011-12.
  • The ITAT had deleted disallowance of ₹3,96,75,870/- made under Section 14A.
  • It also restricted disallowance relating to prior period expenses.
  • Authorities below recorded a concurrent finding that no exempt income was earned by the assessee during the relevant year.

Issues Involved

  1. Whether disallowance under Section 14A can be made when no exempt income is earned during the relevant year.
  2. Whether the amendment to Section 14A by the Finance Act, 2022 is retrospective in nature.
  3. Whether prior period expenses can be allowed when liability crystallizes during the relevant year.

Petitioner’s (Revenue’s) Arguments

  • ITAT erred in deleting disallowance under Section 14A despite nexus between expenditure and potential exempt income.
  • Amendment introduced by Finance Act, 2022 changes the legal position and should be considered.
  • Prior period expenses should have been disallowed as they pertain to earlier years.

Respondent’s (Assessee’s) Arguments

  • No exempt income was earned; hence Section 14A cannot be invoked.
  • Expenses were rightly allowed as they crystallized during the relevant assessment year.
  • Issue already covered by judicial precedents including earlier years of the assessee.

Court Findings / Judgment

  • The Court upheld that Section 14A does not apply where no exempt income is earned.
  • Relied on precedent:
    • Cheminvest Ltd. vs. CIT (Delhi High Court)
  • The Court clarified that:
    • The phrase “does not form part of total income” requires actual receipt of exempt income.
  • On amendment (Finance Act, 2022):
    • Held that such amendment cannot be treated as retrospective if it changes the law.
    • Relied on:
      • Pr. CIT (Central)-2 vs Era Infrastructure (India) Ltd.
  • On prior period expenses:
    • Allowed where liability crystallized in the relevant year.
  • Concluded that:
    • No substantial question of law arises
    • Appeal dismissed

Important Clarifications

  • Section 14A applies only when exempt income is actually earned or receivable.
  • Amendments labeled “for removal of doubts” are not automatically retrospective.
  • Prior period expenses are allowable if liability crystallizes in the relevant year.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:3394-DB/MMH31082022ITA2932022_111527.pdf

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