2024 (10) TMI 650 - AT - Income Tax

ITAT rules Section 14A explanation cannot apply retrospectively despite statutory language following Era Infrastructure precedent

The ITAT Chennai ruled on disallowance under Section 14A regarding investments yielding exempt income. The tribunal held that the newly inserted ... Disallowance u/s 14A - investments yielding exempt income - assessee earned exempt dividend income and also interest from tax free bonds and offered disallowance on account of expenditure - HELD THAT:- The newly inserted explanation to Sec.14A provides that the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income. The Hon’ble Court in Era Infrastructure India Ltd.[2022 (7) TMI 1093 - DELHI HIGH COURT] held the view that the amendment to Sec.14A, though it was for 'for removal of doubts', however, it cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood. Another argument was that the cost of investment has wrongly been taken by Ld. AO. No fault could be found in the approach of CIT(A). Cost of investment, Ld. AO is directed to verify the same and adopt the correct cost of investments as per assessee’s books of accounts. Only those investments would be considered which have actually yielded any exempt income during the year. The cost of investment should not be misunderstood with the ‘net worth’ of demerged entities. The assessee is directed to provide the requisite details. The grounds raised by the revenue stand dismissed. The corresponding ground of assessee’s appeal stand allowed to the extent of correct adoption of cost of investments. TDS credit - AR has submitted that the assessee is in a position to substantiate the TDS credit of Rs. 16.35 Lacs also. Accepting the same, we direct Ld. AO to consider the same with a direction to the assessee to substantiate its claim. The corresponding ground stand allowed for statistical purposes. Issues:1. Disallowance u/s 14A2. TDS CreditDisallowance u/s 14A:The case involved cross-appeals for Assessment Year 2018-19 arising from the order of the Commissioner of Income Tax (Appeals). The revenue raised grounds challenging the CIT(A)'s decision on disallowance u/s 14A, contending that only investments yielding exempt income should be considered. The assessee disputed the disallowance and sought TDS credit for a demerged entity. The Tribunal analyzed the facts, noting the substantial investments made by the assessee and the application of Rule 8D by the AO to compute disallowance. The CIT(A) directed the AO to consider only investments generating exempt income, leading to the appeals. The Tribunal referred to a Delhi High Court decision regarding the retrospective effect of the Finance Act 2022 amendment to Section 14A. It upheld the CIT(A)'s approach and directed the AO to verify the cost of investments, considering only those yielding exempt income. The revenue's grounds were dismissed, while the assessee's appeal was allowed concerning the correct adoption of investment costs.TDS Credit:Regarding TDS credit, the assessee claimed Rs. 68.43 Lacs, with Rs. 52.08 Lacs reflected in Form 26AS. The balance of Rs. 16.35 Lacs related to demerger income. The CIT(A) directed the AO to allow the verified credit of Rs. 52.08 Lacs but did not consider the remaining amount due to lack of specific details. The Tribunal, upon the assessee's submission, directed the AO to consider the additional credit of Rs. 16.35 Lacs upon substantiation. The revenue's appeal was dismissed, while the assessee's appeal was partly allowed. The order was pronounced on 9th October 2024.