Facts of the Case

The present appeal was filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 10 March 2021 for Assessment Year 2013–14.

The Assessing Officer had made a disallowance of ₹3,61,53,268/- under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. However, the ITAT deleted the disallowance on the ground that the assessee had not earned any exempt income during the relevant assessment year.

Aggrieved, the Revenue filed an appeal before the Delhi High Court.

Issues Involved

  1. Whether disallowance under Section 14A read with Rule 8D can be made when no exempt income has been earned by the assessee during the relevant assessment year?
  2. Whether the amendment introduced by the Finance Act, 2022 to Section 14A is retrospective in nature?
  3. Whether prior judicial precedents continue to apply despite the amendment?

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting the disallowance made under Section 14A.
  • Reliance on earlier judgments (such as PCIT vs IL & FS Energy Development Company Ltd.) was incorrect as the Revenue had challenged those decisions before the Supreme Court.
  • The Finance Act, 2022 amendment to Section 14A, which includes a non-obstante clause and explanation, clarifies that disallowance can be made even where no exempt income is earned.
  • Hence, earlier judgments should no longer be treated as good law.

Respondent’s Arguments (Assessee)

  • No exempt income was earned during the relevant assessment year; therefore, Section 14A cannot be invoked.
  • The issue is already settled by binding precedents including:
    • PCIT vs IL & FS Energy Development Company Ltd.
    • Cheminvest Ltd. vs CIT
  • The amendment introduced by Finance Act, 2022 is prospective and cannot be applied retrospectively.

Court’s Findings / Order

The Delhi High Court dismissed the Revenue’s appeal and upheld the ITAT’s order.

  • The amendment to Section 14A by Finance Act, 2022 is prospective and applicable from 1 April 2022 (AY 2022–23 onwards).
  • A provision stated to be “for removal of doubts” cannot automatically be treated as retrospective if it changes the existing law.
  • The Court relied on Supreme Court judgments including:
    • Sedco Forex International Drill Inc. vs CIT
    • M.M Aqua Technologies Ltd. vs CIT
  • Since no exempt income was earned, no disallowance under Section 14A could be made.
  • The issue is already covered by earlier binding precedents.

 Accordingly, the appeal was dismissed.

Important Clarification by Court

  • Even if an amendment uses the phrase “for removal of doubts”, it will not apply retrospectively if it alters the legal position.
  • The law applicable is the one in force during the relevant assessment year, unless explicitly stated otherwise.
  • The Court clarified that the present order shall be subject to the final outcome of the pending SLP before the Supreme Court in related matters.

Sections Involved

  • Section 14A – Disallowance of expenditure relating to exempt income
  • Rule 8D of Income Tax Rules, 1962
  • Finance Act, 2022 (Amendment to Section 14A)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:2690-DB/MMH20072022ITA2042022_171531.pdf

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