2022 (8) TMI 430 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenditure on exempt income earned by the Assessee during the relevant previous year - Scope of amendments to Section 14A of the Act - HELD THAT - We note that the Mumbai Bench of the Tribunal has in the case of Assistant Commissioner of Income Tax- Circle 3(1)(1) Vs Bajaj Capital Ventures (P.) Ltd. 2022 (7) TMI 23 - ITAT MUMBAI and also in the case of K Raheja Corporate Services Private Limited 2022 (7) TMI 1044 - ITAT MUMBAI held that the amendments to Section 14A introduced by the Finance Act 2022 shall apply from Assessment Year 2022-23 and onwards. Further Hon ble Delhi High Court in the case of Principal Commissioner of Income-Tax (Central) -2 Vs. M/s Era Infrastructure India Ltd 2022 (7) TMI 1093 - DELHI HIGH COURT has rejected the contention of the Revenue that amendments to Section 14A introduced by the Finance Act 2022 shall have retrospective effect. Accordingly Ground No.1 raised by the Revenue is dismissed. MAT computation - Disallowance u/s 14A computed as per the provisions of Rule 8D of the Rules for the purpose of computing book profits in terms of Section 115JB - HELD THAT - This issues stands decided in favour of the Assessee by the decision of Special Bench of the Tribunal in the case of ACIT Vs Vireet investments Private Limited 2017 (6) TMI 1124 - ITAT DELHI . Further the Tribunal has in the case of the Assessee for the Assessment Year 2013-14 and 2014-15 deleted identical adjustment made by the Assessing Officer while computing Book Profits for the purpose of Section 115JB - CIT(A) has granted relief to the Assessee by following the aforesaid decisions. It is not the contention of the Revenue that the operation of the aforesaid decisions has been stayed in appeal preferred by the Revenue. In view of the aforesaid and taking into account our findings in paragraph 7 above we hold that there is no infirmity in the order passed by the CIT(A) on this issue. Accordingly Ground No. 2 raised by the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the Commissioner of Income Tax (Appeals) was justified in restricting the disallowance under Section 14A read with Rule 8D(2) of the Income Tax Rules from Rs. 3,02,08,627 to Rs. 7,43,185, corresponding to the exempt income earned by the assessee during the relevant previous year;

(b) Whether the CIT(A) was justified in directing the Assessing Officer to exclude the disallowance under Section 14A read with Rule 8D from the computation of book profits under Section 115JB of the Income Tax Act, relying on the Special Bench decision in the case of Vireet Investment Pvt. Ltd., and the Tribunal's own earlier decisions for the assessee for Assessment Years 2013-14 and 2014-15, despite the Revenue's contention that the matter was sub judice before higher authorities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Restriction of Disallowance under Section 14A read with Rule 8D(2)

Relevant legal framework and precedents: Section 14A of the Income Tax Act empowers the Assessing Officer to disallow expenditure incurred in relation to income which does not form part of total income (exempt income). Rule 8D prescribes the methodology for computing such disallowance. Judicial precedents from the Hon'ble Bombay High Court and the Supreme Court have consistently held that the disallowance under Section 14A cannot exceed the amount of exempt income earned by the assessee during the relevant previous year. Key judgments cited include DCIT Vs Caraf Builders and Constructions Ltd, DCIT Vs State Bank of Patiala, and DCIT Vs Reliance Ports and Terminals Ltd.

Court's interpretation and reasoning: The CIT(A) restricted the disallowance to Rs. 7,43,185, equivalent to the exempt income earned, following binding precedents from the jurisdictional High Court. The Revenue challenged this on the ground that the Finance Act 2022 introduced an Explanation to Section 14A, which retrospectively applies and overrides earlier judicial pronouncements, thereby allowing disallowance beyond exempt income.

Key evidence and findings: The Revenue relied on the Explanation inserted by the Finance Act 2022, which states that Section 14A "shall be deemed to have always applied" in its amended form, indicating retrospective effect. The Revenue also cited the Memorandum to the Finance Bill 2022, which clarifies the retrospective application of the Explanation to Section 14A from 01.04.2022, and Supreme Court decisions emphasizing legislative intent behind retrospective amendments.

The Assessee countered that the amendments are prospective, applicable only from Assessment Year 2022-23 onwards, as explicitly stated in the Memorandum to the Finance Bill 2022. The Assessee relied on Supreme Court rulings that mere use of expressions like "for removal of doubts" does not automatically confer retrospective effect. The Assessee further contended that the Revenue's reliance on judgments concerning years prior to the amendment is misplaced.

Application of law to facts: The Tribunal noted that binding precedents from the Bombay High Court and the Supreme Court restrict disallowance under Section 14A to the amount of exempt income earned. The Tribunal examined the amendment and the Memorandum clarifications and found that the amendments introduced by the Finance Act 2022 apply only prospectively from AY 2022-23 onwards. The Tribunal relied on its own earlier decisions in Bajaj Capital Ventures (P.) Ltd. and K Raheja Corporate Services Pvt. Ltd., as well as the Delhi High Court's ruling in Era Infrastructure India Ltd., which rejected the Revenue's contention of retrospective effect.

Treatment of competing arguments: The Tribunal carefully weighed the Revenue's argument on retrospective effect against the clear legislative intent and judicial pronouncements supporting prospective application. It found the Revenue's reliance on retrospective application unpersuasive, given the express language in the Finance Bill Memorandum and consistent judicial interpretation.

Conclusion: The Tribunal dismissed Ground No. 1, holding that the CIT(A) was justified in restricting the disallowance to the amount of exempt income earned during the relevant year, and that the amendments to Section 14A apply prospectively from AY 2022-23.

Issue 2: Exclusion of Section 14A Disallowance from Book Profits under Section 115JB

Relevant legal framework and precedents: Section 115JB of the Income Tax Act provides for Minimum Alternate Tax (MAT) computed on book profits. The issue is whether the disallowance under Section 14A read with Rule 8D should be added back to book profits. The Special Bench of the Tribunal in ACIT Vs Vireet Investments Pvt. Ltd. held that such disallowance should not be added back to book profits. The Tribunal had also deleted similar adjustments in the assessee's own cases for AY 2013-14 and 2014-15.

Court's interpretation and reasoning: The CIT(A) directed the Assessing Officer to exclude the Section 14A disallowance from book profits computation, following the Vireet Investments Special Bench decision and the Tribunal's own earlier rulings. The Revenue contended that the matter was sub judice and that the disallowance should be included in book profits.

Key evidence and findings: The Tribunal noted that the Revenue did not contend that the operation of the Vireet Investments decision had been stayed or reversed by higher authorities. The Tribunal also took note of the consistency in the Tribunal's approach in the assessee's earlier years.

Application of law to facts: Applying the binding Special Bench decision and the Tribunal's prior rulings, the Tribunal found no infirmity in the CIT(A)'s order directing exclusion of the Section 14A disallowance from book profits under Section 115JB.

Treatment of competing arguments: The Tribunal rejected the Revenue's contention due to lack of any stay or reversal of the Vireet Investments decision and the absence of any contrary binding authority.

Conclusion: Ground No. 2 was dismissed, affirming the CIT(A)'s order that disallowance under Section 14A read with Rule 8D should not be added back to book profits for MAT computation.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"It is admitted position that the Hon'ble Bombay High Court and the Hon'ble Supreme Court have clearly held that disallowance under Section 14A of the Act cannot exceed the amount of exempt income earned by the Assessee during the relevant previous year."

"Accordingly, Ground No.1 raised by the Revenue is dismissed."

"The issue regarding inclusion of disallowance under Section 14A in book profits for the purpose of Section 115JB stands decided in favour of the Assessee by the decision of Special Bench of the Tribunal in the case of ACIT Vs Vireet investments Private Limited... The CIT(A) has granted relief to the Assessee by following the aforesaid decisions... Accordingly, Ground No. 2 raised by the Revenue is dismissed."

Core principles established include:

(i) The disallowance under Section 14A cannot exceed the exempt income earned during the relevant previous year, as held by binding judicial precedents.

(ii) The amendments to Section 14A introduced by the Finance Act 2022 apply prospectively from AY 2022-23 and do not have retrospective effect.

(iii) Disallowance under Section 14A read with Rule 8D should not be added back to book profits under Section 115JB for MAT computation, following the Special Bench ruling in Vireet Investments Pvt. Ltd.

Final determinations on each issue are in favour of the assessee, with the Revenue's appeal dismissed on both grounds.