Disallowance u/s 14A: Prospective or Retrospective Effect of the Amendment?

Deciphering Legal Judgments: A Comprehensive Analysis of Case Law

Reported as:

2022 (7) TMI 1093 - DELHI HIGH COURT

Introduction

This article provides a detailed analysis of a recent judgment delivered by the Hon'ble Delhi High Court regarding the disallowance of expenditure u/s 14A of the Income Tax Act, 1961 (the Act). The case revolves around the scope and applicability of the amendment made to Section 14A by the Finance Act, 2022, and whether the amendment has retrospective or prospective effect.

Arguments Presented

The Revenue (Appellant) challenged the Order dated 10th March, 2021 passed by the Income Tax Appellate Tribunal (ITAT), wherein the ITAT had deleted the disallowance of Rs. 3,61,53,268/- made by the Assessing Officer u/r 8D of the Income Tax Rules, 1962 read with Section 14A of the Act.

The Revenue contended that the ITAT erred in relying on the decision of the Delhi High Court in PR. COMMISSIONER OF INCOME TAX-04 VERSUS IL & FS ENERGY DEVELOPMENT COMPANY LTD. [2017 (8) TMI 732 - DELHI HIGH COURT], wherein it was held that no disallowance u/s 14A can be made if the assessee had not earned any exempt income. The Revenue argued that the amendment made by the Finance Act, 2022 to Section 14A, by inserting a non-obstante clause and an explanation after the proviso, has brought about a change in the law, and consequently, the judgments relied upon by the authorities below, including PCIT vs. IL & FS Energy Development Company Ltd., are no longer good law.

Discussions and Findings of the Court

Prospective or Retrospective Application of the Amendment

The Court observed that the Memorandum of the Finance Bill, 2022 explicitly stipulates that the amendment made to Section 14A will take effect from 1st April, 2022, and will apply in relation to the assessment year 2022-23 and subsequent assessment years.

Reliance on Sedco Forex International Drill. Inc. v. CIT

The Court relied on the Supreme Court's decision in SEDCO FOREX INTERNATIONAL DRILL INC AND OTHERS VERSUS COMMISSIONER OF INCOME-TAX AND ANOTHER [2005 (11) TMI 25 - SUPREME COURT], which held that a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood.

Applicability of the Judgment in PCIT vs. IL & FS Energy Development Company Ltd.

The Court observed that although the judgment of the Delhi High Court in PCIT vs. IL & FS Energy Development Company Ltd. has been challenged and is pending adjudication before the Supreme Court, there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in KUNHAYAMMED AND OTHERS VERSUS STATE OF KERALA AND ANOTHER - 2000 (7) TMI 67 - SUPREME COURT (LB) and SHREE CHAMUNDI MOPEDS LTD. VERSUS CHURCH OF SOUTH INDIA TRUST ASSOCIATION - 1992 (4) TMI 183 - SUPREME COURT, the present appeal was dismissed, being covered by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL & FS Energy Development Company Ltd. and CHEMINVEST LIMITED VERSUS COMMISSIONER OF INCOME TAX-VI - 2015 (9) TMI 238 - DELHI HIGH COURT

Analysis and Decision by the Court

The Court held that the amendment to Section 14A, which is "for removal of doubts," cannot be presumed to be retrospective if it alters or changes the law as it earlier stood. Since the Memorandum of the Finance Bill, 2022 explicitly states that the amendment will take effect from 1st April, 2022, and will apply in relation to the assessment year 2022-23 and subsequent assessment years, the amendment cannot be given retrospective effect.

Further, the Court dismissed the present appeal, being bound by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL & FS Energy Development Company Ltd. and Cheminvest Limited, wherein it was held that no disallowance u/s 14A can be made if the assessee had not earned any exempt income. However, the Court clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of PCIT vs. IL & FS Energy Development Company Ltd.

Summary of the Judgement

The Delhi High Court, in the present case, held that the amendment made to Section 14A of the Income Tax Act, 1961, by the Finance Act, 2022, cannot be given retrospective effect. The Court relied on the Supreme Court's decision in Sedco Forex International Drill. Inc. v. CIT and observed that a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective if it alters or changes the law as it earlier stood.

The Court dismissed the Revenue's appeal, being bound by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL & FS Energy Development Company Ltd. and Cheminvest Limited, wherein it was held that no disallowance u/s 14A can be made if the assessee had not earned any exempt income. However, the Court clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of PRINCIPAL COMMISSIONER OF INCOME TAX 4 Versus M/s IL AND FS ENERGY DEVELOPMENT COMPANY LTD. - 2018 (5) TMI 2126 - SC Order

Full Text:

2022 (7) TMI 1093 - DELHI HIGH COURT