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 explanation to Section 14A cannot be applied retrospectively despite "deemed to have always applied" language, following Era Infrastructure India Ltd precedent. The AO was directed to verify and adopt correct cost of investments from assessee's books, considering only investments that actually yielded exempt income during the year, not net worth of demerged entities. Revenue's grounds were dismissed while assessee's appeal was partially allowed regarding correct adoption of investment costs. Additionally, the AO was directed to consider TDS credit of Rs. 16.35 lacs upon proper substantiation by the assessee.

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Issues:
1. Disallowance u/s 14A
2. TDS Credit

Disallowance 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.

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