2024 (8) TMI 1371 - HC - Income Tax

Disallowance u/s14A - liable to be restricted to the extent of exempt income earned during the year or not? - ITAT held that disallowance u/s 14A would be liable to be restricted to the extent of exempt income earned during the year - HELD THAT - As would be evident from the aforesaid conclusions rendered in Maxopp 2011 (11) TMI 267 - DELHI HIGH COURT it was found that Section 14A is clearly concerned with an identification and attribution of expenditure with reference to exempt income which otherwise would not form part of total income. It was thus explained that where the income of an assesse has both taxable and non-taxable elements, it would be the principle of apportionment of expenditure relating to non-taxable income which would have to be identified. The view expressed by this High Court was ultimately affirmed. Fundamental principle being of ensuring that expenditure incurred in the course of earning exempt income is not set off against income which is otherwise taxable. It is this basic tenet which constrains one to bifurcate and apportion the expenditure which may be claimed by an assessee. Right from Walfort, all judgments rendered in the context of Section 14A and noticed hereinabove, have consistently spoken of apportionment of expenditure and the imperatives of an enquiry to identify whether the expenditure which is claimed is not in relation to exempt income. The expenditure which can be legitimately claimed by an assessee as deductible can only be that which has been expended to earn taxable income. The assessee is not permitted to avail of a dual benefit of firstly claiming the income as being exempt and thereafter seeking to set off the expenditure incurred in connection therewith against income which is taxable. This if countenanced would clearly lead to the taxable income and which is exigible to the levy of tax under the Act being further reduced. As we read Section 14A, it becomes apparent expenditure is liable to be excluded from consideration only if the assessee is found to have earned exempt income and the expenditure pertains to that income. Absent any income which is exempt or claimed as such in the relevant year, the statutory exclusion would not apply. The existence of exempt income is thus a sin qua non for the invocation of Section 14A. It is pertinent to note that the Act is not concerned with notional or illusory income. Thus, unless there be non-taxable income which arises or accrues, the expenditure would not suffer disqualification under Section 14A. We are conscious of the Explanation which has come to be inserted in Section 14A and which now seeks to assert that the provision would apply irrespective of whether exempt income had arisen, accrued or had been received in the previous year. However, the extent to which the said statutory amendment would apply to the assessment years in questions is an issue which we propose to dwell upon in the subsequent parts of this decision. Our view on the imperatives of apportionment and the identification of expenditure with reference to exempt income is further fortified not only from a plain reading of Section 14A (2) which alludes to income which does not form part of total income, but also Rule 8D and which is the machinery provision for determination of the amount of expenditure incurred in relation to exempt income. Expenditure is indelibly linked to income which does not form part of total income and the expenditure being directly relatable to such income. Scope of Explanation appended to Section 14A - High Court in Era Infrastructure 2022 (7) TMI 1093 - DELHI HIGH COURT had clearly held that the mere usage of the expressions for the removal of doubts , clarified or titling a provision as an explanation would not be determinative of whether it is to apply retrospectively. It was thus held that where it be found that the amendment fundamentally alters the statutory position which prevailed, it clearly ceases to be explanatory or one which is aimed at removing an ambiguity. However, any debate that could have possibly ensued in the aforesaid context stands laid to rest by virtue of the Memorandum explaining the provisions of the Finance Bill, 2022 and which unequivocally declares that This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years . We thus find ourselves unable to discern any justifiable reason to take a view contrary to what was expressed in Era Infrastructure. Accordingly, and for all the aforesaid reasons, we uphold the view taken by the Tribunal and dismiss the instant appeals.

Summary

Issues Involved:
1. Delay in filing and refiling the appeal.
2. Disallowance under Section 14A of the Income Tax Act, 1961.
3. Applicability of Explanation to Section 14A inserted by Finance Act, 2022.

Detailed Analysis:

1. Delay in Filing and Refiling the Appeal:
The court condoned the delay in filing and refiling the appeal based on the disclosures made. Consequently, the applications related to this issue were disposed of.

2. Disallowance under Section 14A of the Income Tax Act, 1961:
The appeals challenged the Income Tax Appellate Tribunal's (ITAT) view that disallowance under Section 14A should be restricted to the extent of exempt income earned during the year. The Tribunal upheld the view taken by the Commissioner of Income Tax (Appeals) [CIT(A)], following principles established in the case of Principal Commissioner of Income-Tax vs. Caraf Builders and Constructions PVT. Ltd.

In Caraf Builders, it was held that disallowance of expenditure under Section 14A should not exceed the exempt income earned during that year, even if computed in accordance with Rule 8D of the Income Tax Rules, 1962. This principle was supported by earlier judgments, including those in Maxopp Investment Ltd. v. CIT and CIT v. Holcim India Pvt. Ltd., which emphasized that only expenditure directly related to exempt income should be disallowed.

The court reiterated that Section 14A was introduced to prevent assessees from claiming deductions for expenditures related to exempt income against taxable income. The Supreme Court in Commissioner of Income Tax vs. Walfort Share and Stock Brokers Private Ltd. clarified that expenses could only be allowed to the extent they relate to earning taxable income. The court also referenced Maxopp Investment Limited vs. Commissioner of Income Tax, where it was held that the dominant purpose test is not relevant, and the principle of apportionment of expenses applies.

The court concluded that expenditure is liable to be excluded only if the assessee earned exempt income and the expenditure pertains to that income. The existence of exempt income is a sine qua non for the invocation of Section 14A.

3. Applicability of Explanation to Section 14A inserted by Finance Act, 2022:
The Explanation to Section 14A, inserted by Finance Act, 2022, asserts that the provision applies irrespective of whether exempt income had arisen, accrued, or been received during the previous year. However, the court noted that this amendment explicitly takes effect from April 1, 2022, and applies to assessment year 2022-23 and subsequent years.

The court referenced Principal Commissioner of Income Tax vs. Era Infrastructure (India) Ltd, which held that a retrospective provision in a tax act, even if stated to be for the removal of doubts, cannot be presumed to be retrospective if it alters or changes the law as it earlier stood. The Supreme Court in Sedco Forex International Drill Inc. v. CIT and M.M. Aqua Technologies Ltd. V. CIT reiterated that such provisions are not presumed to be retrospective unless explicitly stated.

The court thus concluded that the Explanation to Section 14A does not apply retrospectively and upheld the Tribunal's view, dismissing the appeals.