PCIT Vs Alchemist Ltd. (Delhi High Court)
Conclusion: Assessee claimed that in section 14A, the disallowance of expenditure even if computed in accordance with Rule 8D could not exceed the exempt income earned in that year. Amendment by inserting Explanation to section 14A would take effect from 1st April, 2022 and accordingly would apply in relation to the assessment year 2022-23 and subsequent assessment years. Therefore, the appeal of Revenue was dismissed for retrospective application of amendment to the relevant assessment year.
Held: Tribunal had while upholding the view taken by CIT (Appeals) followed the principles which had been enunciated by this Court in Principal Commissioner of Income-Tax vs. Caraf Builders and Constructions PVT. Ltd. In Caraf Builders, the Court upon a due appreciation of the scheme underlying Section 14A had held that the disallowance of expenditure under the aforenoted provision would not only be restricted to the exempt income earned during that year, any disallowance even if computed in accordance with Rule 8D could not exceed the exempt income earned in that year. Revenue opined that the incurring of expenditure was liable to be viewed as being totally disconnected or at least its recognition not being dependent upon the actual earning of a return on investment or any exempt income accruing in that year. Accordingly, the bifurcation of expenditure was thus wholly unwarranted. It was held that section 14A mandates that no deduction was allowed for expenses incurred to earn income that was exempt from being part of total income under the Act. The Court further observed that Section 14A prevents assessees from claiming deductions on expenses related to exempt income. It was introduced to stop the misuse of tax incentives, where assessees benefited from both exempt income and deductions, reducing tax on non-exempt income. The bench was of the opinion that for the invocation of Section 14A , the presence of exempt income was thus a sin qua non. The counsel for Revenue contended that the explanation to Section 14A introduced by the 2022 Act effective from April 1, 2022, was clarificatory in nature and was applicable to the current appeals. It was suggested by the counsel that it applied to past assessment years, including those in the present appeals. The Court relied on the memorandum explaining the provisions of the Finance Bill, 2022 which stated that “This amendment will take effect from 1st April, 2022, and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.”. Hence, the retrospective application of the 2022 amendment was rejected.
