2022 (8) TMI 1486 - HC - Income Tax

Addition u/s 14A - exempt income earned or not? - direct and proximate nexus between exempted income which the investment shall generate and the expenditure directly or indirectly involved in earning the said income - HELD THAT - The present case is covered by the judgment of this Court in Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT wherein this Court has held that the expression 'does not form part of the total income' in Section 14A of the Act that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Scope of amendment made by the Finance Act, 2022 to Section 14A - As decided in Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT Amendment to section 14A of the Act which is for removal of doubts cannot be presumed to be retrospective. Allowability of prior period expenses - ITAT and CIT(A) have given concurrent finding of fact on the issue relating to prior period expenses on contract has been allowed in favour of the assessee by the Tribunal in assessment year 2005-06 2017 (10) TMI 1577 - ITAT DELHI Though the appellant in the appeal memo has not mentioned the status of the appeal in assessee s own case for the assessment year 2005-06, yet during the course of hearing, learned counsel for the appellant-revenue admitted that no appeal had been filed against the said order. No substantial question of law

Summary

Issues:
1. Challenge to the ITAT's order regarding addition made under Section 14A of the Income Tax Act, 1961.
2. Interpretation of the amendment to Section 14A by the Finance Act, 2022.
3. Disallowance of prior period expenses and the treatment of such expenses in the profit and loss account.
4. Application of Section 14A when no exempt income is received or receivable during the relevant previous year.

Analysis:
1. The appellant challenged the ITAT's order deleting the addition made under Section 14A of the Income Tax Act, 1961. The counsel argued that there is a direct nexus between exempted income and the expenditure involved in earning that income. The court noted that no exempt income was earned during the relevant year, citing the judgment in Cheminvest Ltd. vs. CIT, [2015] 61 Taxmann.com 118 (Delhi), which clarified that Section 14A does not apply if no exempt income is received or receivable during the relevant previous year.

2. The counsel also pointed out the amendment to Section 14A by the Finance Act, 2022, inserting a non-obstante clause and an explanation. The court referred to a previous judgment in Pr.Commissioner of Income Tax (Central)-2 Vs. M/s Era Infrastructure (India) Ltd., where it was held that such amendments, even if for "removal of doubts," are not presumed to be retrospective if they alter the existing law.

3. Another issue raised was the disallowance of prior period expenses. The appellant contended that the ITAT erred in restricting the addition made on account of prior period expenses. The court noted that the CIT(A) and ITAT had given concurrent findings in favor of the assessee regarding the treatment of such expenses, citing a similar decision in the assessee's own case for the assessment year 2005-06.

4. The court found that no substantial question of law arose for consideration in the present appeal, as there was no appeal filed against the order regarding the prior period expenses for the assessment year 2005-06. Consequently, the court dismissed the appeal based on the findings of fact and interpretation of relevant legal provisions.