The department says the Finance Act 2022 Explanation to s.14A is clarificatory and applies to my old years. Is it?
The Delhi High Court held it is not. The Explanation was inserted with effect from 1 April 2022 and, following its own decision in Era Infrastructure, the Court held that calling a provision an Explanation or saying it is for the removal of doubts does not make it retrospective where it fundamentally alters the statutory position. The Court also upheld the rule that a disallowance, even computed under Rule 8D, cannot exceed the exempt income earned in the year.
Decided by the High Court (Yashwant Varma J and Ravinder Dudeja J) on 2024-08-07, reported as ITA 362/2024 and ITA 384/2024 (High Court of Delhi). It bears on section 14A, section 14A(2), section Rule 8D of the Income Tax Act 1961, in Deductions & Disallowances, Capital Gains Exemptions, How Tax Law Is Read and Appeals matters.
This is the point on which the department and the High Courts are furthest apart, and the library must carry both sides honestly. The Explanation as enacted says the section 'shall apply and shall be deemed to have always applied' where no exempt income has accrued, arisen or been received in the year — language on which the department founds a retrospective reading, and which is genuinely there in the statute. Against that stands the Memorandum to the Finance Bill 2022, which the Court quotes as declaring that the amendment takes effect from 1 April 2022 and applies from AY 2022-23. The High Courts that have decided the question have gone the prospective way — Delhi in Era Infrastructure and again here, Madhya Pradesh in Keti Construction, Gauhati in the Williamson Financial Services group — and no High Court taking the contrary view was located in this pass. But Tribunal benches went both ways before the High Courts spoke, and nothing in this decision resolves how the Explanation operates for AY 2022-23 and afterwards, which is a different question and is untouched. Do not tell a client the matter is settled; tell him which side of 1 April 2022 his year falls on.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Two Revenue appeals, assailing separate Tribunal judgments but heard together, both questioning the Tribunal's view that a disallowance under s.14A must be restricted to the extent of exempt income earned during the year. In each case the Tribunal had upheld the Commissioner (Appeals) and followed the principles laid down by the Delhi High Court in PCIT v. Caraf Builders and Constructions Pvt. Ltd. Counsel for the Revenue argued that the incurring of expenditure is disconnected from, or at least not dependent on, the actual earning of a return on investment or of exempt income in the year, so that no bifurcation of expenditure was warranted; and separately that the Explanation appended to s.14A by the Finance Act 2022, being explanatory, aimed at removing doubts and asserted to be clarificatory, applied to the years before the Court.
The Tribunal's view was upheld and both appeals were dismissed (para 34). A disallowance under s.14A, even if computed in accordance with Rule 8D, cannot exceed the exempt income earned in that year (para 5, following Caraf Builders). The Explanation inserted by the Finance Act 2022 with effect from 1 April 2022 does not apply to the earlier years, the question standing answered against the Revenue by Era Infrastructure (paras 31 and 33).
Although Caraf Builders bound the Court as a decision of a coordinate Bench, the Court heard the appeals on merit because elaborate submissions were addressed (para 8). It traced s.14A from its insertion by the Finance Act 2001 with retrospective effect from 1 April 1962, through the 2006 and 2022 amendments, and read it with Walfort Share and Stock Brokers and with Maxopp Investment, where the Supreme Court rejected the dominant purpose test and applied the principle of apportionment; the requirement of identification and attribution of expenditure with reference to exempt income was held to be the foundation of both Maxopp and Caraf Builders. On the Explanation, the Court held that the mere use of the expressions 'for the removal of doubts' or 'clarified', or the labelling of a provision as an Explanation, is not determinative of retrospective operation, and that where the amendment fundamentally alters the statutory position that prevailed it ceases to be explanatory; and it set against the Revenue's reading the Memorandum explaining the provisions of the Finance Bill 2022, which declares that the amendment takes effect from 1 April 2022 and will accordingly apply in relation to AY 2022-23 and subsequent assessment years — words that appear in this judgment within the extract from Era Infrastructure reproduced at paras 32 to 33, the paragraph in which they fall not being separately ascertainable from the renderings obtained.
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 of the Income Tax Rules, 1962 cannot exceed the exempt income earned in that year.
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Handle my notice → Ask a CA on WhatsAppThe Delhi High Court held it is not. The Explanation was inserted with effect from 1 April 2022 and, following its own decision in Era Infrastructure, the Court held that calling a provision an Explanation or saying it is for the removal of doubts does not make it retrospective where it fundamentally alters the statutory position. The Court also upheld the rule that a disallowance, even computed under Rule 8D, cannot exceed the exempt income earned in the year. This was decided by the High Court (Yashwant Varma J and Ravinder Dudeja J) and bears on section 14A, section 14A(2), section Rule 8D of the Income Tax Act 1961. It is reported as ITA 362/2024 and ITA 384/2024 (High Court of Delhi). This is the point on which the department and the High Courts are furthest apart, and the library must carry both sides honestly. The Explanation as enacted says the section 'shall apply and shall be deemed to have always applied' where no exempt income has accrued, arisen or been received in the year — language on which the department founds a retrospective reading, and which is genuinely there in the statute. Against that stands the Memorandum to the Finance Bill 2022, which the Court quotes as declaring that the amendment takes effect from 1 April 2022 and applies from AY 2022-23. The High Courts that have decided the question have gone the prospective way — Delhi in Era Infrastructure and again here, Madhya Pradesh in Keti Construction, Gauhati in the Williamson Financial Services group — and no High Court taking the contrary view was located in this pass. But Tribunal benches went both ways before the High Courts spoke, and nothing in this decision resolves how the Explanation operates for AY 2022-23 and afterwards, which is a different question and is untouched. Do not tell a client the matter is settled; tell him which side of 1 April 2022 his year falls on. If it applies to you, the first step is this: Write the assessment year at the top of the reply. For AY 2021-22 and earlier, the Explanation does not apply and the pre-amendment line (no exempt income, no disallowance; disallowance capped at exempt income) governs.
Two Revenue appeals, assailing separate Tribunal judgments but heard together, both questioning the Tribunal's view that a disallowance under s.14A must be restricted to the extent of exempt income earned during the year. In each case the Tribunal had upheld the Commissioner (Appeals) and followed the principles laid down by the Delhi High Court in PCIT v. Caraf Builders and Constructions Pvt. Ltd. Counsel for the Revenue argued that the incurring of expenditure is disconnected from, or at least not dependent on, the actual earning of a return on investment or of exempt income in the year, so that no bifurcation of expenditure was warranted; and separately that the Explanation appended to s.14A by the Finance Act 2022, being explanatory, aimed at removing doubts and asserted to be clarificatory, applied to the years before the Court. The matter was decided on 2024-08-07 by the High Court (Yashwant Varma J and Ravinder Dudeja J). On those facts the High Court held as follows. The Tribunal's view was upheld and both appeals were dismissed (para 34). A disallowance under s.14A, even if computed in accordance with Rule 8D, cannot exceed the exempt income earned in that year (para 5, following Caraf Builders). The Explanation inserted by the Finance Act 2022 with effect from 1 April 2022 does not apply to the earlier years, the question standing answered against the Revenue by Era Infrastructure (paras 31 and 33).
Although Caraf Builders bound the Court as a decision of a coordinate Bench, the Court heard the appeals on merit because elaborate submissions were addressed (para 8). It traced s.14A from its insertion by the Finance Act 2001 with retrospective effect from 1 April 1962, through the 2006 and 2022 amendments, and read it with Walfort Share and Stock Brokers and with Maxopp Investment, where the Supreme Court rejected the dominant purpose test and applied the principle of apportionment; the requirement of identification and attribution of expenditure with reference to exempt income was held to be the foundation of both Maxopp and Caraf Builders. On the Explanation, the Court held that the mere use of the expressions 'for the removal of doubts' or 'clarified', or the labelling of a provision as an Explanation, is not determinative of retrospective operation, and that where the amendment fundamentally alters the statutory position that prevailed it ceases to be explanatory; and it set against the Revenue's reading the Memorandum explaining the provisions of the Finance Bill 2022, which declares that the amendment takes effect from 1 April 2022 and will accordingly apply in relation to AY 2022-23 and subsequent assessment years — words that appear in this judgment within the extract from Era Infrastructure reproduced at paras 32 to 33, the paragraph in which they fall not being separately ascertainable from the renderings obtained. In the words reproduced by the source cited on this page: "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 of the Income Tax Rules, 1962 cannot exceed the exempt income earned in that year." The decision followed or applied Principal Commissioner of Income Tax v. Era Infrastructure (India) Ltd — followed on the prospectivity of the Explanation; Principal Commissioner of Income-Tax v. Caraf Builders and Constructions Pvt. Ltd. — followed on the cap; Maxopp Investment Limited v. Commissioner of Income Tax — applied; Commissioner of Income Tax v. Walfort Share and Stock Brokers Private Ltd. — applied.
It was decided by the High Court on 2024-08-07 and is reported as ITA 362/2024 and ITA 384/2024 (High Court of Delhi). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 14A, section 14A(2), section Rule 8D, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Tribunal's view was upheld and both appeals were dismissed (para 34). A disallowance under s.14A, even if computed in accordance with Rule 8D, cannot exceed the exempt income earned in that year (para 5, following Caraf Builders). The Explanation inserted by the Finance Act 2022 with effect from 1 April 2022 does not apply to the earlier years, the question standing answered against the Revenue by Era Infrastructure (paras 31 and 33). It arises in Deductions & Disallowances, Capital Gains Exemptions, How Tax Law Is Read and Appeals matters, on section 14A, section 14A(2), section Rule 8D of the Income Tax Act 1961, and was decided by Yashwant Varma J and Ravinder Dudeja J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For AY 2022-23 and later, do not rely on the pre-amendment line at all for the 'no exempt income' point — argue quantum, the s.14A(2) satisfaction, and the composition of the average instead. When the officer cites the words 'deemed to have always applied', put the Memorandum passage against it, which this judgment reproduces. If the Revenue relies on the Explanation to defeat the cap on quantum for a pre-2022 year, cite paras 5 and 29 to 33 of this judgment together with Caraf Builders. Preserve the point in any appeal memo — no Supreme Court ruling on the prospectivity question was located, and the department has not accepted the High Court view.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citator search on citedby:63125413 returns nothing. A second search pairing "Alchemist Ltd" with "Uno Minda" returns only the two companion judgments of 7 August 2024 themselves. No later decision cites them on the prospective operation of the 2022 Explanation to s.14A, and no Supreme Court matter was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The two appeals were heard and disposed of by one judgment; indiankanoon carries it under two document numbers, one titled for each respondent. The first ?type=print pass returned a rendering in which every paragraph had been compressed to a single line; the judgment was refetched with an instruction to reproduce named paragraphs exactly, which returned the original wording for paras 3 to 8 and 29 to 34, and paras 5 and 33 were separately re-confirmed. Paragraph 1 condones delay; paragraph 2 disposes of the applications. The quotation from Era Infrastructure inside para 32 came back truncated with an ellipsis on both passes and is therefore not reproduced here as a quote. The assessment years in issue are not stated in the portions that could be read verbatim. A further ?type=print pass on this document returned, under the number 5, a different passage altogether — the Rs 19 lakh exempt income, the Rs 75.89 crore and Rs 144.52 crore figures and the reference to Principal CIT v. McDonalds India Pvt. Ltd., all of which is Caraf Builders material. The sentence quoted here was re-confirmed a second time through /docfragment/ on the phrase "upon a due appreciation of the scheme underlying", which returned it labelled paragraph 5 and outside any block quotation. The sentence is certainly the Court's own; the paragraph number should be treated as the less certain part of the citation. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Tribunal's view was upheld and both appeals were dismissed (para 34). A disallowance under s.14A, even if computed in accordance with Rule 8D, cannot exceed the exempt income earned in that year (para 5, following Caraf Builders). The Explanation inserted by the Finance Act 2022 with effect from 1 April 2022 does not apply to the earlier years, the question standing answered against the Revenue by Era Infrastructure (paras 31 and 33).
TaxSphere, “PCIT v Alchemist Ltd; PCIT v Uno Minda Ltd”, https://taxnotice.vittsphere.com/caselaw/case/pcit-v-alchemist-and-uno-minda-14a-explanation-2022-prospective/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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