ITO- 6(2)(1), MUMBAI, MUMBAI vs. CASA BUILDERS PVT. LTD., MUMBAI

All the grounds raised by the Revenue are interrelated and interconnected and relate to challenging the order of the learned CIT(A) in deleting the disallowance made by the AO under Section 14A read with Rule 8D of the Income-tax Act. Therefore, I have decided to adjudicate these grounds through the present consolidated order.

I have heard the counsels for both parties, perused the material placed on record, the judgments cited before me, and the orders passed by the Revenue Authorities. From the records, I noticed that the additions were made by the AO under Section 14A read with Rule 8D by disallowing the claim of the assessee amounting to Rs. 14,81,775/-. However, the learned CIT(A) deleted the same. The operative portion of the order of the learned CIT(A) is contained in paragraphs 5.1 to 5.24.

After having considered the decision of the learned CIT(A) and the submissions of the parties, I notice that the learned DR submitted that the learned CIT(A) failed to consider the foundational principle, which was later reinforced by the Finance Act, 2022, to the effect that disallowance under Section 14A is linked to the expenditure incurred with the intention or potential to earn exempt income and not merely the quantum of exempt income earned. In support of the said contention, the learned DR relied upon the order passed by the AO. Whereas, I am of the view that the learned CIT(A) did not fail to consider this principle. Rather, based on the judicial precedents, the learned CIT(A) held that the amendment made by the Finance Act, 2022 to Section 14A is legally unsustainable for the period under consideration, as it has been decisively held to be prospective and not retrospective.

It is an admitted fact that the year under consideration is AY 2017-18 and the amendment introduced by the Finance Act, 2022 came into effect from 01.04.2022. Thus, the very insertion of this Explanation by the Finance Act and the legislative need to clarify the position demonstrate that the law prior to 01.04.2022 did not support the Revenue's stand. Even otherwise, multiple judicial authorities have held that the amendment made by the Finance Act, 2022 is prospective in nature and cannot be given retrospective operation, as held in the case of TCIT vs. Essar Teleholdings Ltd., ITAT Mumbai, 2023. The constitutional and legal validity of the retrospective application of the said Explanation has also been examined by various High Courts, including the Hon'ble Delhi High Court in Era Infrastructure (India) Ltd. [(2022) 141 taxmann.com 289] and the Hon'ble Calcutta High Court in Avantha Realty Ltd., wherein it has been categorically held that the amendment is prospective in operation and cannot be applied to earlier assessment years. The Memorandum explaining the provisions of the Finance Bill itself clearly stipulates that the amendment would apply from Assessment Year 2022-23 onwards. Thus, for the year under consideration, the settled judicial position prevailing prior to the amendment continues to govern the field.

Moreover, the Coordinate Bench of this Tribunal in the case of DCIT vs. Lodha Developers Ltd., reported in (2022) 143 taxmann.com 442, following the decision of the Hon'ble Delhi High Court, observed and held as under:

Therefore, considering the discussion made above, I find that the learned CIT(A) has passed a well-reasoned and judicious order which requires no interference by this Bench. Accordingly, the grounds raised by the Revenue stand dismissed.

In the result, the appeal filed by the Revenue stands dismissed.