Explanation To Section 14A Of Income Tax Act Will Not Apply Retrospectively: Delhi High Court

The Division Bench of Justices Manmohan and Manmeet Pritam Singh Arora held that in view of the law laid down by the Supreme Court in Sedco Forex International Drill. Inc. versus CIT (2005), the amendment to Section 14A, which is "for removal of doubts", cannot be presumed to be retrospective, even if such a language is used, since it alters and changes the law as it prevailed before.

The Assessing Officer (AO) passed an order making certain disallowances under Rule 8D of the Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 1961. Against this, the assessee M/s Era Infrastructure (India) Ltd. filed an appeal before the ITAT, who deleted the said disallowances. The revenue department filed an appeal before the Delhi High Court against the order passed by the ITAT.

Section 14A of the Income Tax Act provides that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of its total income under the Income Tax Act.

The revenue department submitted before the High Court that the ITAT had relied on the decision of the Delhi High Court in the case of PCIT versus IL & FS Energy Development Company Ltd. (2017), wherein it was held that no disallowance under Section 14A of the Income Tax Act can be made if the assessee had not earned any exempt income. The revenue department averred that since it has challenged the said decision of the Delhi High Court and that an SLP was pending before the Supreme Court, therefore, the ITAT had erred in relying upon the said decision.

The revenue department averred that in view of the amendment made to Section 14A of the Income Tax Act by the Finance Act, 2022, a change in law has been brought about and thus, the decision in PCIT versus IL & FS Energy Development Company Ltd. (2017) was no longer the law.

The Court observed that the Finance Act, 2022 has inserted a non obstante clause to Section 14A of the Income Tax Act. The Court noted that the Explanation added to Section 14A by the Finance Act, 2022 provides and clarifies that, for the removal of doubts, notwithstanding anything to the contrary contained in the Income Tax Act, the provisions of Section 14A shall apply and shall be deemed to have always applied in a case where expenditure has been incurred during the relevant previous year in relation to an exempted income and the said exempted income has not accrued or arisen or has not been received during the said relevant previous year.

The Court further noted that as per the Memorandum of the Finance Bill, the amendment to Section 14A shall take effect from 1^st April, 2022 and shall apply in relation to the assessment year 2022-2023 and the subsequent assessment years.

The Court observed that the Supreme Court in the case of Sedco Forex International Drill. Inc. versus CIT (2005) had held that a retrospective provision in a tax Act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such a language is used, if it alters or changes the law as it earlier stood.

The Court noted that the Supreme Court had held that if an Explanation is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force. However, the Supreme Court had ruled that if the Explanation changes the law, it cannot be presumed to be retrospective, irrespective of the fact that it uses phrases such as "it is declared" or "for the removal of doubts".

Hence, the High Court ruled that the amendment to Section 14A, which is "for removal of doubts", cannot be presumed to be retrospective even if such a language is used, if it alters or changes the law as it stood earlier.

The Court added that though the judgment of the Delhi High Court in PCIT versus IL & FS Energy Development Company Ltd. (2017) has been challenged and is pending adjudication before the Supreme Court, however, there is no stay of the said judgment.

Thus, the Court dismissed the appeal.

"However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of PCIT vs. IL & FS Energy Development Company Ltd (supra).", the Court added.

Case Title: Pr. Commissioner of Income Tax (Central)-2 versus M/s Era Infrastructure (India) Ltd.

Citation: 2022 LiveLaw (Del) 695

Dated: 20.07.2022 (Delhi High Court)

Counsel for the Appellant/ Revenue Department: Mr. Sanjay Kumar, Sr. Standing Counsel with Ms. Easha Kadian, Advocate.

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