The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that the amendment to Section 14A of the Income tax Act, 1961 which aimed to clarify the law, cannot be applied retrospectively if it alters existing law.
The Revenue filed an appeal against the order passed by the Commissioner of Income Tax(Appeals)[CIT(A)] for the assessment year(AY) 2018-19 under section 250 of the Act.
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The Assessing Officer(AO) disallowed Rs.1,28,45,137 under section 14A of the Act, after the assessee had already disallowed Rs.42,31,712 suo motu, resulting in an additional Rs.86,13,425 added. The AO questioned the classification of investments under section 94(7) due to the assessee’s failure to provide necessary documents.
The assessee admitted a misclassification as “out of current investments” but did not give details about shareholding under section 94(7). Consequently, an addition of Rs.72,20,70,412 was confirmed. The assessee being dissatisfied then filed an appeal before the CIT(A).
The CIT(A) accepted the disallowance under section 14A and calculated the weighted average of current and non-current investments and confirmed a disallowance of Rs.24,43,585 at 1% of the annual monthly average, while the assessee had declared Rs.42,31,712. The CIT(A) then restricted the disallowance under section 14A read with Rule 8D to Rs.17,88,127. For the violation of section 94(7), he accepted the assessee’s details and deleted the addition.
The tribunal heard both the submissions and noted that the Departmental Representative(DR) had relied on ITAT, Gauhati Bench’s order in ACIT vs Williamson Financial Services Ltd. (2022), arguing that the amendments to Section 14A of the Finance Act, 2022, applied retrospectively, regardless of exempt income.
In contrast, the Authorized Representative ( AR ) referred to the Bombay High Court‘s decision in HDFC Bank Ltd. vs DCIT-, which held that investments classified as stock in trade made Section 14A inapplicable.
The tribunal also cited the Delhi High Court’s ruling in PCIT vs Era Infrastructure India Ltd. [2022] stating that the amendment of Section 14A, intended “for removal of doubts,” cannot be presumed to be retrospective if it changes existing law. Although this judgment is under appeal in the Supreme Court, there is no stay on it.
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The two member bench comprising Anikesh Banerjee(Judicial Member) and Girish Agrawal(Accountant Member) declined to interfere with the appeal regarding Section 14A and dismissed the revenue’s grounds on this issue.
It remitted the matter back to the AO to verify the details of share purchases under Section 94(7), ensuring the assessee received a reasonable opportunity for hearing. Thus,the appeal filed by the revenue was partly allowed.
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