S. 14A Income Tax Explanation Provisions are not Retrospective: ITAT [Read Order]

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Visakhapatnam Bench, has held that the Explanation to Section 14A of the Income Tax Act, 1961, inserted by the Finance Act, 2022, is prospective in nature and cannot be applied retrospectively. The ruling comes in the case of Ace Urban Developers Private Limited, which had contested an addition made under Section 14A read with Rule 8D, despite not earning any exempt income during the assessment year 2017-18.

The assessee, Ace Urban Developers Private Limited, based in Hyderabad, challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which had upheld the addition made by the Assessing Officer (AO). The AO relied on the Explanation to Section 14A, introduced by the Finance Act, 2022, which states that the provision applies even if no exempt income is earned.

The assessee argued that the Explanation was introduced only from April 1, 2022, and could not be retrospectively applied to an assessment year prior to that. The company cited Delhi High Court’s ruling in PCIT vs. Era Infrastructure (India) Limited, which had previously held that the amendment was only prospective.

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It was noted that, “during the year under consideration. In the case of Principal Commissioner of Income Tax vs. IL&FS Energy Development Company Ltd (2017), the Hon'ble Delhi High Court held that no disallowance could be made U/s. 14A of the Act, if no exempt income was earned by the assessee. Further, in the case of PCIT vs. Era Infrastructure (India) Limited (supra), the Hon'ble Delhi High Court has held that the Explanation to section 14A cannot be presumed to have retrospective effect and it shall be made applicable only with effect from 01/04/2022.”

After hearing both sides, the ITAT Bench, comprising Judicial Member Shri K. Narasimha Chary and Accountant Member Shri S. Balakrishnan, ruled in favor of the assessee. The tribunal noted that multiple High Courts, including the Delhi High Court, had already clarified that the Explanation cannot be presumed to have retrospective effect.

By applying this precedent, the ITAT struck down the addition and held that no disallowance under Section 14A read with Rule 8D could be made when no exempt income was earned. The appeal of the assessee was thus allowed.

To Read the full text of the Order CLICK HERE

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