Revenue appeal dismissed as Section 14A disallowance deleted; Finance Act 2022 amendment not retrospective for AY 2022-23 onward -23

The HC dismissed the revenue's appeal, upholding the ITAT's deletion of the Section 14A disallowance and finding the Finance Act, 2022 amendment to Section 14A not retrospective (effective 1 Apr 2022 for AY 2022-23 onwards). The Court followed its earlier Division Bench rulings (including the ILFS and Cheminvest decisions) that no disallowance under Section 14A can be made where no exempt income was earned, noting those decisions remain binding and no stay exists; the order will await and abide by the Supreme Court's eventual decision in the related SLP.

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Issues:
Challenge to ITAT order on disallowance under Rule 8D of Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 1961.
Interpretation of the amendment to Section 14A of the Act by the Finance Act, 2022.
Applicability of the amendment to Section 14A with retrospective effect.

Analysis:
The High Court heard an Income Tax Appeal challenging the ITAT's order concerning the disallowance of Rs.3,61,53,268 under Rule 8D of Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 1961 for the Assessment Year 2013-14. The Appellant contended that the ITAT erred in law by deleting the disallowance. The Appellant argued that the ITAT's reliance on a specific decision was incorrect, as the revenue had not accepted that decision and had filed an SLP against it. The Appellant also highlighted the amendment made by the Finance Act, 2022 to Section 14A of the Act, inserting a non obstante clause and an explanation, which altered the existing law. However, it was noted that the amendment would only be effective from 1st April, 2022, for the assessment year 2022-23 and subsequent years.

The High Court referred to the Supreme Court's judgment in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717, which emphasized that a retrospective provision in a tax act, aimed at "removal of doubts," should not be presumed to be retrospective if it changes the existing law. The Court cited legislative history and previous decisions to support the principle that amendments altering the law should not be applied retrospectively. The Court further referenced another Supreme Court decision in M.M Aqua Technologies Ltd. v. Commissioner of Income Tax, Delhi-III, 2021 SCC OnLine SC 575, reiterating the principle that amendments changing the law should not be presumed to have retrospective effect.

Consequently, the High Court held that the amendment to Section 14A, being "for removal of doubts," should not be considered retrospective if it changes the existing law. Despite the pending challenge to the judgment before the Supreme Court, the High Court dismissed the appeal, citing previous judgments and emphasizing that the order would abide by the final decision of the Supreme Court in the relevant case. The High Court's decision was based on the principles established in previous rulings and the interpretation of the amendment to Section 14A of the Act.

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