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Facts
The Revenue filed an appeal against the order of the CIT(A) concerning the disallowance under Section 14A. The Revenue challenged the restriction of the disallowance to the extent of exempt income, arguing that the explanation inserted by the Finance Act, 2022 should apply retrospectively.
Held
The Tribunal held that the Explanation inserted to Section 14A by the Finance Act, 2022 is applicable prospectively. Consequently, the disallowance under Section 14A cannot exceed the exempt income.
Key Issues
Whether the explanation inserted to Section 14A by the Finance Act, 2022 is applicable retrospectively or prospectively, and whether disallowance under Section 14A can exceed exempt income.
Sections Cited
14A, 143(3)
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Income Tax Appellate Tribunal, ‘F’ BENCH
Before: SHRI AMIT SHUKLA & SHRI PRABHASH SHANKAR
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue against order dated 15/01/2025, passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) for A.Y.2017-18.
In the grounds of appeal
1. Revenue has challenged the order of the ld. CIT(A) holding that disallowance u/s.14A should be restricted to the extent of exempt income without appreciating the fact for explanation to Section 14A inserted by the Finance Act, 2022 w.e.f. 01/04/2022 should deem to have been applied with retrospective effect.
3. At the outset, both the parties agreed that this issue now stands covered by the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure India Limited reported in (2022) 448 ITR 674 and also by the Hon’ble Guwahati High Court in the case of Williamson Financial Services Limited vs. Commissioner of Income Tax, Deputy Commissioner of Income Tax, Guwahati in ITA/2/2024, ITA/4/2024, ITA/6/2024, ITA/7/2024 judgment and order dated 24/09/2024. Before us, ld. DR had relied upon the decision of the ITAT, Guwahati Bench in the case of Williamson Financial Services Limited vide order dated 06/07/2022 wherein, the Tribunal has held that the amendment brought vide Explanation to Section 14A by the Finance Act, 2022 w.e.f. 01/04/2022 will apply retrospectively. But now the said judgment has now been reversed by the Hon’ble Guwahati High Court wherein following questions of law were admitted. "A. Whether in the facts and circumstances of the case, the order dated 06.07.2022 passed by the learned Income Tax Appellate Tribunal in holding that the insertion of the Explanation to Section 14A of the Income Tax Act of 1961 is clarificatory and thereby retrospective in nature is erroneous as well as perverse and thereby the same is erroneous in law. B. Whether the finding of the learned Tribunal to the effect that the insertion of the Explanation to Section 14A of the Income Tax Act, 1961 is clarificatory is contrary to the legislative intention as expressed in the Memorandum to the Finance Bill, 2022 whereby it was stated that the amendment shall be applicable from 01.04.2022 and the Assessment year 2022-2023 onwards and thereby whether the said order passed by the learned Tribunal is erroneous in law."
4. The Hon’ble High Court after relying to the ratio laid down by the Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure (India ) Ltd. (supra) wherein, similar question was considered whether the Explanation inserted u/s.14A is retrospective in nature and also referred to the judgment of the Hon’ble Calcutta High Court in the case of M/s. Jas Toll Road Company Ltd., and another judgment of Calcutta High Court in the case of Avanta Realty Ltd., The various judgments of the Hon’ble High Courts have discussed the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure (India) Ltd., thereafter have referred to various other judgments from para 15 onwards which are as under:- “15. In Pr.CIT Vs. M/s Era Infrastructure India Ltd., order dated 16:07 2024 (supra), the Deli High Court, relying on the decision rendered in "Pr CIT Vs. Era infrastructure (India) Ltd., Judgment dated 20.07.2022 (supra), has dismissed the appeal preferred on behalf of the Revenue.
16. The High Court of Kolkata in M/S Jas Toll Road Company Ltd. (supra) has dismissed the appeal filed by the Revenue while relying on the decision of the Delhi High Court rendered in "Pr.CIT Vs. Era Infrastructure (India) Ltd., Judgment dated 20.07.2022" (supra) and held that the explanation inserted to Section 14A by Finance Act, 2022 will be applicable prospectively The operative portion of the decision rendered in Mis Jas Toll Road Company Ltd. (supra) is reproduced hereunder: "Upon careful consideration and going through the materials on record we find that the learned tribunal was fully justified in dismissing the appeal filed by the revenue affirming the order passed by the Commissioner of Income Tax (Appeals), Kolkata- 20. The issue involved in the case is that whether disallowance under Section 14A of the Act can be made even if the assessee has not earned any exempt income, the issue is no longer res integra and there are several decisions to the effect that amendment made under Section 14A of the Act by Finance Act, 2022 will be applicable prospectively and disallowance should not exceed the exempt income earned by the assessee during the year. The PCIT has also noted the decision of the Hon'ble Supreme Court in CIT vs. Chettinad Logistics Pvt. Ltd [2018] 95 taxmann.com 250 and PCIT-18 vs. Oil Industries Development Board, SLP (Civil) Diary No.2755/2019. Thus, we find no ground to interfere with the order passed by the learned tribunal. Accordingly, the appeal is dismissed and the substantial questions of law are answered against the revenue"
17. In Avantha Realty Ltd. (supra), the High Court of Calcutta, relying on the decision of Delhi High Court, rendered in "Pr.CIT Vs. Era Infrastructure (India) Ltd., Judgment dated 20.07.2022" (supra), has dismissed the appeal filed by the Revenue and held that the Explanation inserted to Section 14A by Finance Act, 2022 will be applicable prospectively. The operative portion of the decision in Avantha Realty Ltd. (supra) reads as under: "Substantial questions Nos. D & E pertain to the deletion of the disallowance made under Section 14A of the Act. The leamed Tribunal took note of the decision of the High Court of Deth in Era infrastructure (India) Ltd. (supra), which had taken note of the decision in the case of Cheminvest Ltd. (supra), wherein it was held that amendment by the Finance Act, 2022 of Section 14 A of the Act by inserting a non-obstante clause and explanation we take effect from 01.04.22 and cannot be presumed to have retrospective effect and, therefore, on facts the amendment cannot be applied to the assessment year under consideration. We find no error in such conclusion arrived at by the leamed Tribunal. Accordingly, substantial questions of law No.D & E are decided against the revenue."
Later on, the Delhi High Court, in Uni parts India Ltd. (supra), has made a specific statement that so far as the applicability of Explanation inserted to Section 14A by Finance Bill, 2022 is concerned, it is settled that the same will apply prospectively.
The High Court of Madhya Pradesh has also followed the same view in Principal Commissioner of Income Tax (Central) Vs. Keti Construction Ltd., reported in [2024] 162 taxmann.com.
In view of the Memorandum Explaining the Provisions in the Finance Bill, 2022 and various decisions rendered by the different High Courts, we also hold that the Explanation inserted to Section 14A vide Finance Act, 2022 is applicable prospectively.
Respectfully following the ratio of various judgments of Hon’ble Delhi and Gauhati High Court, we hold that disallowance u/s.14A cannot exceed the exempt income and accordingly, we do not find any infirmity in the order of the ld. CIT (A) restricting the disallowance u/s.14A to the exempt income and accordingly, the grounds raised by the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced on 22nd May,2025.