Loading judgment…
Facts
The assessee, U.P. State Sugar Corporation Ltd., filed an appeal for AY 2011-12 challenging the CIT(A)'s confirmation of various additions including cane development expenses, gratuity provision, prior period expenses, and a disallowance under Section 14A. Separately, the Revenue filed cross-appeals for AY 2011-12 to 2014-15 against CIT(A) orders deleting Section 14A disallowances. The central contention regarding Section 14A revolved around whether disallowance for expenditure relating to exempt income can be made when no exempt income was actually earned by the assessee during the relevant years, especially in light of the Explanation inserted into Section 14A by Finance Act, 2022.
Held
The Tribunal held that the Explanation inserted into Section 14A by Finance Act, 2022, effective from 01/04/2022, is prospective and not retrospective. Therefore, for the assessment years under appeal (2011-12 to 2014-15), no disallowance under Section 14A can be made in the absence of any exempt income earned by the assessee, as established by various High Court and Supreme Court precedents. Consequently, all appeals filed by the Revenue were dismissed. The assessee's appeal for AY 2011-12, concerning other additions, was partly allowed, with the specific issues remanded back to the Assessing Officer for a de novo order due to lack of factual clarity.
Key Issues
1. Whether disallowance under Section 14A of the Income Tax Act can be made when the assessee has not earned any exempt income during the assessment year. 2. Whether the Explanation inserted into Section 14A by Finance Act, 2022, is prospective or retrospective in nature. 3. The validity of additions related to cane development expenses, provision for gratuity, and prior period expenses.
Sections Cited
14A, 143(3), 253(3), 43B, 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, LUCKNOW BENCH ‘B’, LUCKNOW
Before: SHRI KUL BHARAT & SHRI ANADEE NATH MISSHRA
has been filed by the assessee for assessment year 2011-12 against impugned appellate order dated 06/05/2020 passed by learned Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. In this appeal, the assessee has raised the following grounds of appeal:
“1. BECAUSE, the Ld. Commissioner of Income Tax (Appeals) erred in law, and on facts in confirming the addition of Rs. 46811 TV-being cane development expenses without considering the fact that such expenses are incurred for business of the assessee. ADDITION OF Rs.4,68,111/-
BECAUSE, the Ld. Commissioner of Income Tax (Appeals) erred in law, and on facts in confirming the addition of Rs.38,52,24,618/- being provision of gratuity written off in the books, without considering the fact that such provisions have already been added in the income of the assessee over the last many years and hence cannot be taxed twice. ADDITION OF Rs.38,52,24,618/-
BECAUSE, the Ld. Commissioner of Income Tax (Appeals) erred in law, and on facts in confirming the addition of Rs.1,90,36,043/- without considering the fact that such prior period expenses came to light in the said assessment year and the liabilities were crystallised during the relevant assessment year only.
Because, on the facts and in the circumstances of the case, the CIT(A) has passed the order without providing the assessee with a due and proper opportunity of hearing and therefore, the impugned order deserves to be set aside being bad in law.”
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 3 587/Lkw/2019, 485/Lkw/2010 and 588/Lkw/2019 have been filed by Revenue for assessment years 2011- 2012 to 2014-15 against impugned appellate orders dated 06/05/2020, 24/07/2019, 28/06/2019 and 24/07/2019 respectively passed by learned Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. The grounds taken by Revenue are reproduced as under:
1. Learned CIT(A) had erred in law and on facts in deleting the addition of Rs.12,70,62,755/- u/s 14A of the Act without appreciating the fact that Section 14A does not use the word ‘income of the year’ but ‘income under the act’ and CBDT circular no. 05/2014 dated 11/02/2014 makes it clear that the expenses, which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether such income has been earned during the financial year or not.
“1. Learned CIT(A) had erred in law and on facts in deleting the addition of Rs.5,23,46,666/- u/s 14A of the Act without appreciating the fact that Section 14A does not use the word ‘income of the year’ but ‘income under the act’ and CBDT circular no. 05/2014 dated 11/02/2014 makes it clear that the expenses, which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether such income has been earned during the financial year or not.” “1. Learned CIT(A) had erred in law and on facts in deleting the addition of Rs.7,35,64,119/- u/s 14A of the Act without appreciating the fact that Section 14A does not use the word ‘income of the year’ but ‘income under the act’ and CBDT circular no. 05/2014 dated 11/02/2014 makes it clear that the expenses, which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether such income has been earned during the financial year or not.”
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 4 “1. Learned CIT(A) had erred in law and on facts in deleting the addition of Rs.5,79,43,101/- u/s 14A of the Act without appreciating the fact that Section 14A does not use the word ‘income of the year’ but ‘income under the act’ and CBDT circular no. 05/2014 dated 11/02/2014 makes it clear that the expenses, which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether such income has been earned during the financial year or not.” (B) The appeal filed by the assessee is beyond time limit prescribed under section 253(3) of IT Act. As per noting of registry, this appeal is time barred by 03 days only. The assessee has submitted application for condonation of delay in filing of the appeal; pleading that the delay was unintentional and beyond the control of the assessee and has requested to admit the appeal for hearing. The learned Sr. Departmental Representative for Revenue did not express any objection to assessee’s application for condonation of delay in filing of the appeal. In view of the foregoing, and in specific facts and circumstances of the present appeal before us, the delay in filing of this appeal is condoned; and the appeal is admitted for hearing.
(C) For the sake of convenience, consolidated order is being passed in these five appeals.
(C.1) In assessment year 2011-12, cross appeals have been filed by the two sides. Assessment order dated 29/03/2014 was passed u/s 143(3) of the Act. In the aforesaid assessment order, a total addition of Rs.66,94,48,964/- was made, which included addition of Rs.4,68,111/- on account of cane development expenses, an amount of Rs.13,76,57,437/- u/s 43B of the Act, an addition of Rs.38,52,24,618/- on account of rejection of assessee’s claim for deduction u/s 43B of the Act; an addition of Rs.1,90,36,043/- on account of disallowance of prior period expenses and further addition of Rs.12,70,62,755/- was also made u/s 14A of the Act. In , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 5 the course of appellate proceedings in Income Tax Appellate Tribunal, the following documents were filed from the assessee’s side:
Income Tax return of assessment year 2011-12 2. Computation of income for assessment year 2011-12 3. Audited balance sheet for the assessment year 2011-12 4. Annexures of tax audit report of assessment year 2011-12 5. Copy of order of Hon'ble Delhi High Court in the case of Pr. CIT vs. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi) 6. Copy of order of Hon'ble Allahabad High Court in the case of CIT vs. Shivam Motors (P.) Ltd. [2015] 55 taxmann.com 262 (Allahabad) 7. Copy of Hon'ble Delhi High Court order in the case of CIT vs. Holcim India P. Ltd. in and (C.2) In Revenue’s appeal for assessment year 2011-12 vide Assessing Officer u/s 14A of the Act amounting to Rs.12,70,62,755/-. The relevant portion of the assessment order is reproduced below:
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 6 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 7 (C.2.1) Vide impugned appellate order dated 06/05/2020, the learned CIT(A) deleted the aforesaid addition of Rs.12,70,62,755/-. The relevant portion of the impugned appellate order dated 06/05/2020 is reproduced as under:
Proportion to the exempt income. In view of the above, I find that the addition made by the Assessing Officer Is incorrect and accordingly the same is directed to be deleted.
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 8 (D) At the time of hearing before us, the learned CIT (D.R.) submitted that section 14A was amended with effect from 01/04/2022 whereby Explanation was inserted to Section 14A of the Act. The learned D.R. further submitted that disallowance u/s 14A of the Act is to be made; in view of the aforesaid Explanation to section 14A of the Act regardless of whether or not exempt income has accrued or arisen to the assessee and irrespective of whether any exempt income has been received by the assessee notwithstanding anything to the contrary contained in Income Tax Act; if expenditure has been incurred by the assessee in relation to exempt income. The learned CIT (D.R.) also drew our attention to explanatory notes issued by CBDT regarding the aforesaid amendment to section 14A of the Act whereby the aforesaid Explanation was inserted. The relevant portion of the aforesaid explanatory note dated 03/11/2022 issued under Circular No. 23/2022 (F.No.370142/48/2022-TPL) is reproduced as under:
“10. Clarification in respect of disallowance under section 14A in absence of any exempt income during an assessment year 10.1 Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income as per the provisions of the Act (exempt income).
10.2 Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year.
10.3 CBDT issued Circular No. 5/2014, dated 11/02/2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, an assessee incurs , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 9 an expense of ₹1 lakh to earn non-exempt income of ₹1.5 lakh and also incurs an expense of ₹20,000/- to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued/received during the year, it amounts to holding that ₹20,000/- would be allowed as deduction against non-exempt income of ₹1.5 Lakh even though this expense was not incurred wholly and exclusively for the purpose of earning non-exempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act.
10.4 In order to make the intention of the legislation clear and to make it free from any misinterpretation, FA 2022 has inserted an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in the Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.
Applicability: This amendment is effective from the 1st day of April, 2022.
10.5 Further, FA 2022 also amended sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Act and provide that and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in any other provisions of this Act.
Applicability: This amendment is effective from the 1st day of April, 2022.”
(D.1) Learned Authorized Representative for the assessee relied on the aforesaid impugned order of learned CIT(A).
(D.1.1) We have heard both sides. We have perused materials on record. For the ease of reference, Explanation to Section 14A of the Act is reproduced below, inserted by way of amendment of Income Tax Act, with effect from 01/04/2022:
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 10 “Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.”
There is no dispute over the fact that the exempt income earned by the assessee during the year was nil. In the case of CIT vs. Shivam Motors 272 CTR 277 (All)/(2015) 55 taxmann.com 262 (All), it was held by Hon'ble jurisdictional High Court that in the absence of tax free income earned by the assessee, the disallowance u/s 14A could not be made. To quote from the aforesaid order of Hon'ble Allahabad High Court, “10. As regards the second question, s. 14A of the Act provides that for the purposes of computing the total income under the chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of the fact is that the assessee had not earned any tax-free income. Hence, in the absence of any tax-free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order.”
In the case of Pr.CIT vs. IL&FS Energy Development Corporation, Hon'ble Deolhi High Court has taken the same view. Relevant portion of the order is reproduced as under:
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 11 Hon'ble Delhi High Court has taken the same view that no disallowance u/s 14A of the Act can be made if the assessee has not earned any exempt income; in the cases reported at Cheminvest Ltd. vs. CIT [2015] 61 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 12 taxmann.com 118/378 ITR 33 (Del) and Pr. CIT vs. IL&FS Energy Development Co. Ltd. [2017] 84 taxmann.com 186/399 ITR 483 (Del), CIT vs. Holcim India Private Limited 272 CTR 282 (Delhi)/(2014) 90 CCH 081- DEL (vide order dated 05/09/2014 in and 299/2014). It will be helpful to read the following portion of the order of Hon'ble Delhi High Court in the case of CIT vs. Holcim India P. Ltd. (supra):
“14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., I. T. Act No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (li) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:
As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 13 question of law. Hence, the deletion of the disallowance of Rs.2,03,752/-made by the Assessing Officer was in order
Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.”
Similar view in favour of the assessee and against Revenue has been taken on this issue by Hon'ble Madras High Court in the case of CIT vs. Chettined Logistics (P.) Ltd. [2017] 80 taxmann.com 221 (Mad) and it may be mentioned that SLP of Revenue against the order of Hon'ble Madras High Court has been dismissed by Hon'ble Supreme Court vide CIT vs. Chettined Logistics (P.) Ltd. [2018] 95 taxmann.com 250(SC). Hon'ble Punjab & Haryana High Court in the case reported at CIT vs. Hero Cycles Limited [2010] 323 ITR 518 and in CIT vs. Winsome Textile Industries Ltd. [2009] 319 ITR 204 has also taken similar view holding that section 14A cannot be invoked when no exempt income was earned. Same view has also been taken by Hon'ble Gujarat High Court in the case of CIT vs. Corrtech Energy Pvt. Ltd. [2014] 223 taxmann.com 130 (Guj). In a number of other orders passed by Hon'ble High Courts, the view has been taken that no disallowance can be made u/s 14A of the Act if no exempt income was earned by the assessee. A few such orders of Hon'ble High Courts are , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 14 Pr.CIT vs. Era Infrastructure (India) Ltd. [2022] 448 ITR 674 (Delhi and Pr.CIT vs. Oil Industry Development Board 103 taxmann.com 325 (Delhi). It may be mentioned that Revenue’s SLP on this issue, against order of Hon'ble Delhi High Court was dismissed by Hon'ble Supreme Court in Pr.CIT vs. Oil Industry Development Board [2019] 103 taxmann.com 326 (SC). In view of the foregoing precedence of various High Courts, including that of Hon'ble jurisdictional High Court, it is held that no disallowance can be made u/s 14A of the Act when there is no exempt income earned by the assessee.
(D.2) As regards whether the assessee is hit by the aforesaid amendment to section 14A of the Act whereby Explanation was inserted; it is found from the aforesaid circular No.23 of 2022 dated 03/11/2022 of CBDT that the circular itself specifically states that the amendment is with effect from 01/04/2022. Since the appeal pertains to assessment year 2011-12, the aforesaid amendment (effect from 01/04/2022) whereby Explanation to Section 14A of the Act was inserted; has no application to the present appeal before us. Moreover, it has also been held by Hon'ble Delhi High Court in Pr. CIT vs. Era Infrastructure (India) Ltd. [2022] 448 ITR 674 (Delhi)/[2022] 141 taxmann.com 289 (Delhi) that the aforesaid mentioned section 14A of the Act is prospective in nature and not retrospective. Similar view has been taken by Hon'ble Gauhati High Court in the case of Williamsome Financial Services Ltd. vs. CIT 141 taxmann.com 289 (Gau) and Hon'ble Calcutta High Court in the case of Pr. CIT vs. Avantha Realty Ltd. (2024) 164 taxmann.com 376 (Cal). Relevant portion of order of Hon'ble Delhi High Court in the case of Pr.CIT vs. Era Infrastructure (India) Ltd. (supra) is reproduced below for the ease of reference:
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 15 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 16 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 17 Co. Ltd. (supra), and Cheminvest Ltd. vs. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delh)
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 18 Respectfully following the aforesaid orders of various High Court, it is inferred that Explanation to section 14A of the Act is prospective in nature and not retrospective and therefore, it is held that the assessee is not hit by the aforesaid Explanation to Section 14A of the Act inserted with effect from 01/04/2022. This view has also been taken by Lucknow Bench of the Tribunal in the case of APCO Infratech Pvt. Ltd., & 357/Lkw/2020, order dated 02/04/2025. The relevant portion of the aforesaid order of Lucknow Bench of Tribunal is reproduced below:
“(D.1) The second issue in this appeal is regarding the disallowance made by the Assessing Officer under section 14A of the Act, amounting to Rs.2,56,56,447/-. The Assessing Officer disallowed the aforesaid amount holding that this amount represented interest expenses in relation to making investments, income from which would not be includable in the assessee’s hand. In the impugned appellate order, the learned CIT(A) deleted the aforesaid addition after considering the assessee’s submission that the exempt income, not included in taxable income of the assessee was nil. The assessee further submitted that the assessee had not incurred any expenses against exempt income. The relevant portion of the impugned order of learned CIT(A) is reproduced as under:
, 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 19 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 20 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 21 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 22 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 23 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 24 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 25 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 26 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 27 , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 28 (D.1.1) There is no dispute on the fact that the assessee’s exempt income, not included in taxable income of the assessee, during the year was nil. It was held by Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT [2015] 61 taxmann.com 118 (Delhi) that disallowance u/s 14A of the Act is not attracted when exempt income during the year is nil. In this case, Hon'ble Delhi High Court held as under:
“5. In the AY in question, the Appellant borrowed funds on which interest expenditure of Rs.1,21,03,367/- was incurred. The factual assertion of the Appellant, which has not been controverted, is that in the relevant AY no dividend income was earned by the Appellant from the amount invested in various shares. For the AY in question, the Appellant filed a return of income declaring a loss of Rs.13,84,086/-. This case was picked up for scrutiny and the Assessing Officer (AO) completed the assessment under Section 143(3) of the Act disallowing Rs.97,87,570/- out of the total expenditure incurred during the year under Section 14A of the Act. The reason recorded by the AO for this disallowance was that the borrowed funds were utilized for the purpose of purchase of shares for the purpose to earn dividend income which is exempted under section 10(33) of the Act and thus, not forming a part of the total income, and therefore the interest paid thereon had to be disallowed under Section 14A.
It may be mentioned at this stage that the Assessee has made a distinction between investments in unquoted shares, which was in the sum of Rs.4,16,155/-, and investments in shares (other than trade) on long term basis to the extent of Rs.6,88,70,000/-. Based on the aforementioned distinction, the AO in the assessment order dated 28 th December, 2006, computed the disallowance as Rs.97,87,570/- , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 29 being the interest paid on borrowed funds invested in long terms shares.
Mr. Ajay Vohra, learned Senior counsel appearing for the Assessee, produced the balance sheet and profit and loss account as well as the computation of income prepared by the Assessee for the AY in question i.e. 2004-05. In the balance sheet, it is seen that the investment in quoted shares of Max India Limited is shown under the head „quoted-other than trade-long term‟. An investment of approximately Rs.2,13,38,698 over the previous year has been made in the shares of Max India Ltd. It is also seen that the investments in other investment companies to the extent of Rs.4,61,155 is shown under the sub-head „unquoted-trade-long term‟. This figure has remained unchanged over the previous year. In the computation filed for the purposes of the income tax return, the details of investments have been shown in two broad categories of „capital assets‟ and „trading assets‟ and the investment in Max India Limited is under the head „trading assets‟ with the investments in the investment companies shown under the head of „capital assets‟.
The AO appears to have proportionately disallowed, for the purposes of Section 14A of the Act, the interest attributable to the long term investment (other than trade) for the purposes of earning exempted income. Since the unsecured loan borrowed for the purpose was Rs.6,88,70,000 the disallowance of the amount under Section 14 A of the Act was calculated thus: "1,21,03,367 x 6,88,70,000 = Rs. 97,87,570 8,51,65,000"
(D.1.1.1) Further the assessee’s claim that no disallowance u/s 14A of the Act is attracted is also supported by orders of Hon'ble Supreme Court cases of South Indian Bank Limited vs. CIT [2021] 130 taxmann.com 178 / 283 Taxman 178 (SC) and CIT vs. UTI Bank Limited [2022] 142 taxmann.com 136 / 289 Taxman 238 (SC). The assessee’s contention is further supported by order of Hon'ble Gujarat High Court in the case of Pr. CIT vs. Sintex Industries Ltd. [2017] 82 taxmann.com 171 (Guj). SLP filed by Revenue against the order of Hon'ble Gujarat High Court was dismissed by Hon'ble Supreme Court in [2018] 93 taxmann.com 24 / 255 Taxman 171 (Supreme Court).
(D.1.1.2) Our attention was drawn by learned Departmental Representative to explanation inserted by Finance Act, 2022 in , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 30 amendment of section 14A of the Act, reproduced below for the ease of reference:
“[Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.] (D.1.1.3) The learned D.R. contended that the explanation has retrospective effect and the assessee is hit by the aforesaid explanation. She further submitted that considering the aforesaid explanation, the disallowance made by the Assessing Officer u/s 14A of the Act should be confirmed. The learned Authorized Representative for the assessee submitted that the aforesaid explanation to section 14A of I.T. Act is prospective in nature; and in view thereof, it has no application to the present case.
(D.2) Whether the aforesaid explanation to section 14A of the Act is retrospective or prospective has been considered by various Hon'ble High Courts in the cases reported as Pr. CIT vs. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi), Williamson Financial Services Ltd. vs. CIT [2024] 166 taxmann.com 607 (Gauhati) and Pr. CIT vs. Avantha Realty Ltd. [2024] 164 taxmann.com 376 (Calcutta). In these decisions, Hon'ble High Courts have held that the amendment to section 14A of the Income Tax Act, whereby the aforesaid explanation was inserted, is prospective in nature, and not retrospective. Respectfully following the aforesaid decisions of Hon'ble High Courts, it is held that explanation to section 14A of the Act, inserted by amendment brought about by Finance Act, 2022, with effect from 01/04/2022, is prospective in nature and has no application to the assessment year 2016-17 to which this appeal pertains. Accordingly, it is held that the assessee is not hit by the aforesaid explanation to section 14A of the Act in so far as assessment year 2016-17 is concerned. Further, in respectful consideration of precedents mentioned in foregoing paragraphs (D.1.1) and (D.1.1.1) of this order; it is held that no disallowance is attracted u/s 14A of IT Act in assessment year 2016-17. In view of , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 31 the foregoing, we decline to interfere with the order of learned CIT(A) on this issue.
(D.2.1) On cumulative consideration of foregoing paragraphs (D), (D.1), (D.1.1) and (D.2) of this order, it is held that Explanation to section 14A of the Act, inserted by way of amendment of Income Tax Act with effect from 01/04/2022, is prospective in nature and does not have retrospective effect. Therefore, the aforesaid Explanation to section 14A of the Income Tax Act has no application for assessment year pertaining to the appeal before us and the assessee’s case, accordingly, is not hit by aforesaid Explanation to section 14A of the Act. It is further held that no disallowance u/s 14A of the Act can be made in the absence of any exempt income for the assessment years relevant to the appeal as the assessee’s case is not hit by aforesaid Explanation to section 14A of the Act. Therefore, Revenue’s appeal in 2011-12 is dismissed.
(E) As regards Revenue’s appeals for assessment year 2012-13, 2013-14 and 2014-15 vide 485 and 588 respectively, the facts are identical in pari materia with facts of Revenue’s appeal vide 2011-12. No material facts have been brought for our consideration from either side to distinguish the facts of Revenue’s aforesaid appeals for assessment year 2012-13, 2013-14 and 2014-15 from facts of Revenue’s aforesaid appeal for assessment year 2011-12. No material has been brought for our consideration to persuade us to take a view in Revenue’s aforesaid appeals for assessment year 2012- 13, 2013-14 and 2014-15 from the view taken by us in Revenue’s appeal for assessment year 2011-12 in foregoing paragraphs (D) to (D.2) of this order, Therefore, our decision in Revenue’s aforesaid appeal for assessment year 2011-12 will also apply mutatis mutandis to Revenue’s appeals for assessment year 2012-13, 2013-14 and 2014-15, following the same , 229/Lkw/20, 587/Lkw/19, 485/Lkw/19, 588/Lkw/19 32 reasoning. In view of the foregoing, Revenue’s appeals for assessment years 2012-13, 2013-14 and 2014-15 are also dismissed.
(F) As regards assessee’s appeal for assessment year 2011-12 in it was agreed by representatives of both sides that factual matrix, as apparent from records, lacks clarity and further that the issues in dispute should be restored back to the file of the Assessing Officer. Therefore, on these issues, the impugned order of learned CIT(A) is set aside and restored back to the file of the Assessing Officer with the direction to pass de novo order in accordance with law after providing reasonable opportunity to the assessee.
(G) In the result, the appeals of the Revenue are dismissed and the appeal of the assessee is partly allowed for statistical purposes.
(Order pronounced in the open court on 16/05/2025)