The AO applied the 2022 Explanation to s.14A to an old year. Can he do that?
No. The Explanation inserted by the Finance Act 2022 is prospective from 1 April 2022 and governs assessment year 2022-23 onwards. A 'removal of doubts' label does not make an amendment retrospective where it in truth changes the law, and the Memorandum to the Finance Bill said so expressly.
Decided by the High Court (Delhi High Court — Manmohan J and Ms. Manmeet Pritam Singh Arora J (judgment by Manmohan J)) on 2022-07-20, reported as [2022] 141 taxmann.com 289 (Del) / [2022] 288 Taxman 384 (Del) / [2022] 448 ITR 674 (Del); IT Appeal No. 204 of 2022 and CM APPL. No. 31445 of 2022. It bears on section 14A, section Rule 8D of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
Since the amendment, this is the argument that decides most pending s.14A appeals for earlier years, because the department's whole case is that the Explanation was always the law. The reasoning is not confined to s.14A: the Sedco Forex test for so-called clarificatory amendments applies wherever the department reads a later insertion backwards. The Court also held that a pending Special Leave Petition without a stay does not suspend the existing position.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2013-14 the Assessing Officer disallowed Rs 3,61,53,268 under Rule 8D read with s.14A although the assessee had earned no exempt income. The Tribunal deleted the disallowance by its order in ACIT v. Era Infrastructure (India) Ltd., IT Appeal No. 798/Del/2018, dated 10 March 2021, following this Court's decision in Pr. CIT v. IL&FS Energy Development Co. Ltd. Before the High Court the Revenue took two points: that IL&FS Energy Development had not been accepted and an SLP against it was pending, and that the Explanation inserted in s.14A by the Finance Act 2022 — together with the non obstante clause added to sub-section (1) — had changed the law, so that the decisions relied on below were no longer good law.
The appeal was dismissed. The amendment of s.14A, being 'for removal of doubts', cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood (para 8). The appeal was held to be covered by the Court's earlier decisions in IL&FS Energy Development Co. Ltd. and Cheminvest Ltd., and although one of those judgments was under challenge in the Supreme Court there was no stay of it, so on the principle in Kunhayammed and Shree Chamundi Mopeds it continued to bind (para 9). The disposition is expressly conditional: the Court clarified that the order passed in the appeal shall abide by the final decision of the Supreme Court in the SLP filed in IL&FS Energy Development Co. Ltd. (para 10).
The Court set the Revenue's argument against the Memorandum to the Finance Bill 2022, which says in terms that the amendment takes effect from 1 April 2022 and applies in relation to assessment year 2022-23 and subsequent years (para 5). It then set out the Supreme Court's reasoning in Sedco Forex International Drill Inc. v. CIT at length: that the law to be applied is that in force in the relevant assessment year unless otherwise provided; that an Explanation may clear up an ambiguity or may add to and widen the scope of the main section; that if it is clarificatory it is read into the main provision from the time that provision came into force, but if it changes the law it is not presumed to be retrospective, whatever the phrase used (para 6); and it noted the same proposition reiterated in M.M. Aqua Technologies Ltd. v. CIT (para 7). It concluded that the s.14A amendment, though labelled for removal of doubts, cannot be presumed retrospective if it alters the law as it stood (para 8). On the Revenue's other point, that the precedent relied on was under challenge, the Court applied Kunhayammed and Shree Chamundi Mopeds: a pending SLP without a stay does not displace the judgment, so the appeal stood covered by IL&FS Energy Development and Cheminvest (para 9). It then added the clarification that its own order would abide by the Supreme Court's final decision in that SLP (para 10).
the amendment of section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood
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Handle my notice → Ask a CA on WhatsAppNo. The Explanation inserted by the Finance Act 2022 is prospective from 1 April 2022 and governs assessment year 2022-23 onwards. A 'removal of doubts' label does not make an amendment retrospective where it in truth changes the law, and the Memorandum to the Finance Bill said so expressly. This was decided by the High Court (Delhi High Court — Manmohan J and Ms. Manmeet Pritam Singh Arora J (judgment by Manmohan J)) and bears on section 14A, section Rule 8D of the Income Tax Act 1961. It is reported as [2022] 141 taxmann.com 289 (Del) / [2022] 288 Taxman 384 (Del) / [2022] 448 ITR 674 (Del); IT Appeal No. 204 of 2022 and CM APPL. No. 31445 of 2022. Since the amendment, this is the argument that decides most pending s.14A appeals for earlier years, because the department's whole case is that the Explanation was always the law. The reasoning is not confined to s.14A: the Sedco Forex test for so-called clarificatory amendments applies wherever the department reads a later insertion backwards. The Court also held that a pending Special Leave Petition without a stay does not suspend the existing position. If it applies to you, the first step is this: Pin down the assessment year and say plainly that the Explanation did not exist in the year under assessment.
For assessment year 2013-14 the Assessing Officer disallowed Rs 3,61,53,268 under Rule 8D read with s.14A although the assessee had earned no exempt income. The Tribunal deleted the disallowance by its order in ACIT v. Era Infrastructure (India) Ltd., IT Appeal No. 798/Del/2018, dated 10 March 2021, following this Court's decision in Pr. CIT v. IL&FS Energy Development Co. Ltd. Before the High Court the Revenue took two points: that IL&FS Energy Development had not been accepted and an SLP against it was pending, and that the Explanation inserted in s.14A by the Finance Act 2022 — together with the non obstante clause added to sub-section (1) — had changed the law, so that the decisions relied on below were no longer good law. The matter was decided on 2022-07-20 by the High Court (Delhi High Court — Manmohan J and Ms. Manmeet Pritam Singh Arora J (judgment by Manmohan J)). On those facts the High Court held as follows. The appeal was dismissed. The amendment of s.14A, being 'for removal of doubts', cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood (para 8). The appeal was held to be covered by the Court's earlier decisions in IL&FS Energy Development Co. Ltd. and Cheminvest Ltd., and although one of those judgments was under challenge in the Supreme Court there was no stay of it, so on the principle in Kunhayammed and Shree Chamundi Mopeds it continued to bind (para 9). The disposition is expressly conditional: the Court clarified that the order passed in the appeal shall abide by the final decision of the Supreme Court in the SLP filed in IL&FS Energy Development Co. Ltd. (para 10).
The Court set the Revenue's argument against the Memorandum to the Finance Bill 2022, which says in terms that the amendment takes effect from 1 April 2022 and applies in relation to assessment year 2022-23 and subsequent years (para 5). It then set out the Supreme Court's reasoning in Sedco Forex International Drill Inc. v. CIT at length: that the law to be applied is that in force in the relevant assessment year unless otherwise provided; that an Explanation may clear up an ambiguity or may add to and widen the scope of the main section; that if it is clarificatory it is read into the main provision from the time that provision came into force, but if it changes the law it is not presumed to be retrospective, whatever the phrase used (para 6); and it noted the same proposition reiterated in M.M. Aqua Technologies Ltd. v. CIT (para 7). It concluded that the s.14A amendment, though labelled for removal of doubts, cannot be presumed retrospective if it alters the law as it stood (para 8). On the Revenue's other point, that the precedent relied on was under challenge, the Court applied Kunhayammed and Shree Chamundi Mopeds: a pending SLP without a stay does not displace the judgment, so the appeal stood covered by IL&FS Energy Development and Cheminvest (para 9). It then added the clarification that its own order would abide by the Supreme Court's final decision in that SLP (para 10). In the words reproduced by the source cited on this page: "the amendment of section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood" The decision followed or applied Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 / 234 Taxman 761 / 378 ITR 33 (Delhi); Pr. CIT v. IL&FS Energy Development Co. Ltd. [2017] 84 taxmann.com 186 / 250 Taxman 174 / 399 ITR 483 (Delhi); Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352 / 279 ITR 310 (SC); M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145 / 282 Taxman 281 / 436 ITR 582 (SC); Kunhayammed v. State of Kerala [2000] 113 Taxman 470 / 245 ITR 360 (SC); Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association [1992] 3 SCC 1.
It was decided by the High Court on 2022-07-20 and is reported as [2022] 141 taxmann.com 289 (Del) / [2022] 288 Taxman 384 (Del) / [2022] 448 ITR 674 (Del); IT Appeal No. 204 of 2022 and CM APPL. No. 31445 of 2022. 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 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 appeal was dismissed. The amendment of s.14A, being 'for removal of doubts', cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood (para 8). The appeal was held to be covered by the Court's earlier decisions in IL&FS Energy Development Co. Ltd. and Cheminvest Ltd., and although one of those judgments was under challenge in the Supreme Court there was no stay of it, so on the principle in Kunhayammed and Shree Chamundi Mopeds it continued to bind (para 9). The disposition is expressly conditional: the Court clarified that the order passed in the appeal shall abide by the final decision of the Supreme Court in the SLP filed in IL&FS Energy Development Co. Ltd. (para 10). It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 14A, section Rule 8D of the Income Tax Act 1961, and was decided by Delhi High Court — Manmohan J and Ms. Manmeet Pritam Singh Arora J (judgment by Manmohan 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. Quote the Memorandum's own words on the effective date rather than arguing only from the text of the Explanation. Where the AO relies on a pending Special Leave Petition, put on record that there is no stay. Do not use this to resist a disallowance for assessment year 2022-23 or later; on those years the Explanation applies on its own terms.
Still good law. Followed by the Calcutta High Court in Pr. CIT (Central) v. Avantha Realty Ltd. [2024] 164 taxmann.com 376 (Calcutta), decided 19 June 2024, and by the Gauhati High Court in Williamson Financial Services Ltd. v. CIT [2024] 166 taxmann.com 607 (Gauhati), decided 24 September 2024, both holding the Finance Act 2022 Explanation to s.14A prospective from 1 April 2022. But the decision carries its own condition: at para 10 the Court clarified that the order passed in the appeal shall abide by the final decision of the Supreme Court in the SLP filed against Pr. CIT v. IL&FS Energy Development Co. Ltd. [2017] 399 ITR 483 (Delhi), the precedent on which it rests. The outcome of that SLP was not established. 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.
This is the retrospectivity half of a pair — the Cheminvest entry supplies the underlying rule that there is no disallowance without exempt income, and the two are normally argued together; this Court treats the appeal as covered by Cheminvest and by IL&FS Energy Development. The construction point comes from Sedco Forex International Drill Inc. v. CIT (2005) 279 ITR 310 (SC), reiterated in M.M. Aqua Technologies Ltd. v. CIT (2021) 436 ITR 582 (SC), and is not limited to s.14A. Note two things the reports usually omit. The Court dealt with the pending SLP against IL&FS Energy Development by applying Kunhayammed and Shree Chamundi Mopeds — a pending SLP without a stay does not displace the judgment. And at para 10 it clarified that its own order shall abide by the final decision of the Supreme Court in that SLP, so the relief is conditional on an outcome that has not been traced. The outcome of the Special Leave Petition against Pr. CIT v. IL&FS Energy Development Co. Ltd. [2017] 399 ITR 483 (Delhi) was not established, and the order in this appeal is expressly made to abide by it (para 10). 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 appeal was dismissed. The amendment of s.14A, being 'for removal of doubts', cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood (para 8). The appeal was held to be covered by the Court's earlier decisions in IL&FS Energy Development Co. Ltd. and Cheminvest Ltd., and although one of those judgments was under challenge in the Supreme Court there was no stay of it, so on the principle in Kunhayammed and Shree Chamundi Mopeds it continued to bind (para 9). The disposition is expressly conditional: the Court clarified that the order passed in the appeal shall abide by the final decision of the Supreme Court in the SLP filed in IL&FS Energy Development Co. Ltd. (para 10).
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