ITAT Hyderabad Rules on Prospective Application of Finance Act 2022 Amendment to Section 14A
Background and Context
The Hyderabad Bench “B” of the Income Tax Appellate Tribunal in NCC Infrastructure Holdings Limited Vs ACIT (ITAT Hyderabad) examined a recurring controversy under Section 14A of the Income Tax Act 1961 read with Rule 8D of the Income Tax Rules 1962:
Can a disallowance under
Section 14Abe made for an assessment year in which the assessee has not earned any exempt income, particularly for years prior to the amendment brought in by theFinance Act 2022?
The decision is significant for assessees who had investments capable of yielding exempt income but did not actually receive any exempt income during a particular assessment year, especially for years preceding the insertion of the Explanation to Section 14A by the Finance Act 2022.
Facts of the Case
Return of Income and Loss Position
- The assessee, NCC Infrastructure Holdings Limited, is a company.
- For Assessment Year 2017-18, it filed its return of income on 30/10/2017.
- The assessee declared:
- Loss of
Rs. 2,76,89,21,681/-; and - Book loss of
Rs. 9,06,60,050/-.
- Loss of
Scrutiny Assessment and Investments
During scrutiny proceedings, the Assessing Officer noted:
- The assessee had incurred interest expenditure during the year.
- Simultaneously, it held investments aggregating to
Rs. 4,96,16,65,412/-.
On this basis, the Assessing Officer formed the view that:
- Borrowed funds on which interest was paid were utilised, at least in part, for making investments; and
- Such investments, by their nature, were capable of yielding income not includible in total income.
Accordingly, invoking Section 14A read with Rule 8D, the Assessing Officer computed a disallowance equivalent to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments. This amount was added back to the assessee’s income.
First Appeal Before CIT(A) – NFAC
Assessee’s Core Contention
Before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, the assessee took the categorical stand that:
- There was no exempt income earned during Assessment Year 2017-18; and
- In absence of any exempt income, no disallowance could be made under
Section 14A.
CIT(A)’s Reasoning
The learned CIT(A) rejected the assessee’s contention and upheld the disallowance. The decision rested primarily on two planks:
Amendment to Section 14A by Finance Act 2022
- The CIT(A) relied on the Explanation inserted in
Section 14Aby theFinance Act 2022. - This Explanation clarifies that a disallowance under
Section 14Acan be made even where no exempt income has actually arisen or been received during the relevant previous year. - On this basis, the CIT(A) held that disallowance was permissible despite the absence of exempt income.
- The CIT(A) relied on the Explanation inserted in
Reliance on ITAT Guwahati Decision
- The CIT(A) referred to the decision of the Guwahati Bench of the Tribunal in:
- ACIT Vs Williamson Financial Services Limited, ITA No. 159/Gau/2019, order dated 06/07/2022.
- In that case, the Tribunal had upheld a disallowance under
Section 14Aeven in circumstances where no exempt income had been reported.
- The CIT(A) referred to the decision of the Guwahati Bench of the Tribunal in:
On these grounds, the CIT(A) dismissed the assessee’s appeal by order dated 27/01/2023.
Second Appeal Before ITAT Hyderabad
The assessee challenged the order of the CIT(A) before the Hyderabad Bench of the Tribunal.
Assessee’s Arguments
The authorised representative for the assessee advanced the following key submissions:
- Prospective Nature of the 2022 Amendment
- The Explanation to
Section 14Aintroduced by theFinance Act 2022is prospective in its operation. - It cannot be applied to Assessment Year 2017-18, which pertains to a period prior to the amendment.
- The Explanation to