2023 (2) TMI 1412 - AT - Income Tax

Assessee's appeal allowed under Section 14A read with Rule 8D as no exempt income claimed, disallowance deleted

The ITAT Delhi allowed the appeal of the assessee against the disallowance made under section 14A read with Rule 8D. The tribunal deleted the addition ... Addition made u/s 14A r/w rule 8D - Expenditure incurred on earning exempt income - HELD THAT:- Disallowance made by the AO and upheld by the CIT(A) is deleted keeping in view a very important relevant factual position that the assessee has not claimed any exempt income in its computation of income. Therefore, the grounds of the assessee are allowed and the AO is directed to delete the addition made by him u/s 14A of the Act r.w.r 8D - Appeal filed by the assessee is allowed. ISSUES: Whether disallowance under section 14A read with Rule 8D is sustainable when no exempt income is received or receivable by the assessee for the relevant assessment year.Whether the amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation applies retrospectively to assessment years prior to 2022-23.Whether binding judicial precedents favoring the assessee regarding non-applicability of section 14A disallowance without exempt income were correctly followed. RULINGS / HOLDINGS: The disallowance under section 14A read with Rule 8D is not sustainable where 'no exempt income was neither received nor receivable' by the assessee for the relevant assessment year, and such addition is to be deleted.The amendment to section 14A introduced by the Finance Act, 2022, including the non-obstante clause and Explanation, 'will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years' and thus is not retrospective; it cannot be presumed retrospective 'if it alters or changes the law as it earlier stood.'The binding judicial precedents of the jurisdictional High Court, including Pr.CIT Vs. IL&FS Energy Development Co. Ltd and Pr.CIT Vs. Era Infrastructure (India) Ltd, which hold that disallowance under section 14A is not applicable without exempt income, must be followed. RATIONALE: The legal framework is based on section 14A of the Income-tax Act and Rule 8D of the Income-tax Rules, 1962, as well as amendments made by the Finance Act, 2022.The Court relied on the Memorandum of the Finance Bill, 2022, which explicitly states that the amendment to section 14A is prospective, effective from assessment year 2022-23 onwards.The Court applied the Supreme Court precedent in Sedco Forex International Drill Inc. v. CIT, which holds that a retrospective provision 'for the removal of doubts' cannot be presumed retrospective if it changes the law as it earlier stood.Further, the Supreme Court in M.M Aqua Technologies Ltd. v. CIT reiterated this principle, emphasizing that explanations widening the scope of a provision are not presumed retrospective if they change existing law.The Court observed that the amendment to section 14A is not clarificatory but changes the law, and thus cannot be applied retrospectively to the assessment year under consideration.The Court acknowledged that the judgment favoring the assessee is challenged before the Supreme Court but noted there is no stay on the judgment, and thus the binding precedent applies.The Court dismissed the appeal against deletion of the addition under section 14A but clarified that the order is subject to the final decision of the Supreme Court on the related SLP.