2024 (9) TMI 1571 - HC - Income Tax

Disallowance u/s 14A r.w.r.8D - explanation inserted to Section 14A by Finance Act, 2022 applied Retrospectively or prospectively - HELD THAT - 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. Thus, the order passed by the Tribunal dated 06.07.2022, holding that insertion of Explanation to Section 14A of the Income Tax Act, 1961 is clarificatory and thereby retrospective in nature, is erroneous in law. The findings of the Tribunal to the effect that the insertion of Explanation to Section 14A is clarificatory, is contrary to the legislative intention as expressed in Memorandum to the Finance Bill, 2022. We have also taken note of the fact that the Bench of the Tribunal, in earlier decision rendered in Deputy Commissioner of Income Tax, Circle - 4 (1) , Kolkata Versus M/s. Rav Dravya Private Limited 2022 (11) TMI 842 - ITAT KOLKATA while relying on decision of Delhi High Court in Pr.CIT Vs. Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT has held that the Explanation inserted to Section 14A is applicable prospectively. However, the same Bench, while deciding the Miscellaneous Applications, preferred on behalf of the appellants subsequently has concluded that the decision of the Delhi High Court is not binding the Tribunal.

Summary

Issues Involved:
1. Invocation of Section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Retrospective vs. prospective application of the Explanation to Section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Invocation of Section 14A read with Rule 8D of the Income Tax Rules, 1962:

The appellant, Williamson Financial Services Limited, filed its return of income for the Assessment Year 2013-14 showing a loss. The Assessing Officer (AO) issued notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961, and after scrutiny, passed an assessment order disallowing Rs.8,36,61,825/- under Section 14A by applying Rule 8D. The AO noted that the appellant had made disallowances under Section 14A based on estimates without following a systematic method, thereby invoking Rule 8D for calculating the disallowance.

The appellant challenged the AO's order before the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeal. The CIT(A) affirmed the invocation of Section 14A read with Rule 8D but held that the disallowance could not exceed the exempt income. The CIT(A) relied on the Delhi High Court's decision in Joint Investment Private Limited vs. Commissioner of Income Tax, which stated that disallowance under Section 14A should not exceed the exempt income.

2. Retrospective vs. Prospective Application of the Explanation to Section 14A of the Income Tax Act, 1961:

The Tribunal set aside the CIT(A)'s order, holding that the Explanation to Section 14A inserted by the Finance Act, 2022, is clarificatory and thereby retrospective. The appellant contended that this finding was contrary to the legislative intent, as the Memorandum to the Finance Bill, 2022, clarified that the amendment would take effect from 01.04.2022 and apply to the assessment year 2022-23 onwards.

The appellant relied on several High Court decisions, including the Delhi High Court's judgment in Principal Commissioner of Income Tax Vs. Era Infrastructure (India) Ltd., which held that the Explanation to Section 14A is prospective. The High Court of Calcutta also followed this view in Principal Commissioner of Income Tax, Central-1, Kolkata Vs. M/S Jas Toli Road Company Ltd., and Principal Commissioner of Income-tax (Central) Vs. Avantha Realty Ltd.

The Revenue's counsel admitted that, based on the Memorandum and various High Court decisions, the Explanation to Section 14A is prospective. The High Court noted the consistent judicial interpretation that the Explanation to Section 14A, inserted by the Finance Act, 2022, is prospective and cannot be applied retrospectively.

Judgment:

The High Court held that the Tribunal's order, which deemed the Explanation to Section 14A as retrospective, was erroneous. The Court affirmed that the Explanation is prospective, aligning with the legislative intent and judicial precedents. Consequently, the appeals were allowed, and the Tribunal's order was set aside, affirming the CIT(A)'s orders dated 31.01.2019.

The High Court also observed the inconsistency in the Tribunal's decisions regarding the binding nature of the Delhi High Court's judgment, emphasizing the need for consistency in judicial matters to maintain credibility.