ELARA CAPITAL (INDIA) PRIVATE LIMITED,MUMBAI vs. ACIT- CIRCLE 6(2)(2), MUMBAI

PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against order dated 13.03.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2017-18, raising following grounds:

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assessment proceedings, the Assessing Officer n assessment proceedings, the Assessing Officer noticed that assessee oticed that assessee has made investments which are eligible for yielding exempted has made investments which are eligible for yielding exempted has made investments which are eligible for yielding exempted income. Though no exempted income was earned during the year income. Though no exempted income was earned during the year income. Though no exempted income was earned during the year under consideration but the assessee did not make any suo moto under consideration but the assessee did not make any suo moto under consideration but the assessee did not make any suo moto disallowance in terms of section 14A of the Act. Therefore, the disallowance in terms of section 14A of the Act. disallowance in terms of section 14A of the Act. Assessing Officer asked the assessee as to why the Rule 8D of Assessing Officer asked the assessee as to why the Rule 8D Assessing Officer asked the assessee as to why the Rule 8D income-tax Rules, 1962 ( In short the Rules) tax Rules, 1962 ( In short the Rules) might not be invoked. might not be invoked. The Assessing Officer rejected the contention of the assessee and The Assessing Officer rejected the contention of the assessee and The Assessing Officer rejected the contention of the assessee and invoking Rule 8D(2)(ii) invoking Rule 8D(2)(ii), computed disallowance @ 1% of annual @ 1% of annual average of monthly average of the investment amounting to average of monthly average of the investment average of monthly average of the investment Rs.32,90,000/- and assessed total income accordingly in the order and assessed total income accordingly in the order and assessed total income accordingly in the order passed u/s 143(3) of the Act on 29.11.2019. passed u/s 143(3) of the Act on 29.11.2019.

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was chargeable to income was chargeable to income-tax. Hence no disallowance was required tax. Hence no disallowance was required to be made u/s 14A r.w. Rule 8D. The assessee also relied on the to be made u/s 14A r.w. Rule 8D. The assessee also relied on the to be made u/s 14A r.w. Rule 8D. The assessee also relied on the finding of the Ld. CIT(A) for assessment year 2011 finding of the Ld. CIT(A) for assessment year 2011- -12 to 2013-14. But the Ld. CIT(A) ) in instant year referred to the Circular No in instant year referred to the Circular No. 5/2014 dated 11.04.2014 and observed that for the purposes of 5/2014 dated 11.04.2014 and observed that for the purposes of 5/2014 dated 11.04.2014 and observed that for the purposes of section 14A of the Act section 14A of the Act, the expenditure relatable to earning of the expenditure relatable to earning of exempt income have to be considered for disallowance irrespective exempt income have to be considered for disallowance irrespective exempt income have to be considered for disallowance irrespective of whether any such of whether any such income had been earned during the financial income had been earned during the financial year or not. The Ld. CIT(A) further referred to amendment brought year or not. The Ld. CIT(A) further referred to amendment brought year or not. The Ld. CIT(A) further referred to amendment brought in section 14A of the Act in section 14A of the Act by way of Finance Act 2022 by way of Finance Act 2022 and observed that said amendment was in the nature of the clarification on the that said amendment was in the nature of the clarification on the that said amendment was in the nature of the clarification on the issue of disallowance llowance in absence of any exempt income during the in absence of any exempt income during the assessment year u/s 14A of the Act. The Ld. CIT(A) relying on u/s 14A of the Act. The Ld. CIT(A) relying on u/s 14A of the Act. The Ld. CIT(A) relying on various decisions mentioned in the impugned order observed that various decisions mentioned in the impugned order observed that various decisions mentioned in the impugned order observed that clarification got in by way of amendment of 2022 shall apply clarification got in by way of amendment of 2022 shall apply clarification got in by way of amendment of 2022 shall apply retrospectively. The relevant finding of the Ld. CIT(A) is reproduced retrospectively. The relevant finding of the Ld. CIT(A) is reproduced retrospectively. The relevant finding of the Ld. CIT(A) is reproduced as under:

“6.10 In view of the above discussion, the contentions of the 0 In view of the above discussion, the contentions of the 0 In view of the above discussion, the contentions of the appellant that no exempt income has been earned and appellant that no exempt income has been earned and appellant that no exempt income has been earned and therefore, provisions of section 14A of the Act cannot be therefore, provisions of section 14A of the Act cannot be therefore, provisions of section 14A of the Act cannot be invoked, is hereby, rejected. The appellant company is invoked, is hereby, rejected. The appellant company is invoked, is hereby, rejected. The appellant company is engaged in the business of provid engaged in the business of providing professional services to ing professional services to client of any issue. The claim of the appellant that appellant is client of any issue. The claim of the appellant that appellant is client of any issue. The claim of the appellant that appellant is holding investment as the investment having potential to holding investment as the investment having potential to holding investment as the investment having potential to attract LTCG, did not maintain of any record are also not attract LTCG, did not maintain of any record are also not attract LTCG, did not maintain of any record are also not tenable in view of discussion made in aforesai tenable in view of discussion made in aforesaid para and as d para and as per per per IT(14th IT(14th IT(14th amendment) amendment) amendment) Rule, Rule, Rule, 2016 2016 2016 applicable applicable applicable w.e.f. w.e.f. w.e.f. 02.06.2016, the expenditure in relation to income which does 02.06.2016, the expenditure in relation to income which does 02.06.2016, the expenditure in relation to income which does not form part of the total income shall be aggregate of the not form part of the total income shall be aggregate of the not form part of the total income shall be aggregate of the

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following amounts, namely, provided such expenditure should following amounts, namely, provided such expenditure should following amounts, namely, provided such expenditure should not be exceeded the total expenditure claimed by the ceeded the total expenditure claimed by the ceeded the total expenditure claimed by the assessee.....During the AY 2017 assessee.....During the AY 2017-18 the disallowance under 18 the disallowance under section 14A r.w.r. 8D was worked out with new methodology r.w.r. 8D was worked out with new methodology prescribed for working of expenses attributable to exempt prescribed for working of expenses attributable to exempt prescribed for working of expenses attributable to exempt income as per Rule 8D of the IT Act. F income as per Rule 8D of the IT Act. Further, the appellant has urther, the appellant has not maintained books of account separately for trading and not maintained books of account separately for trading and not maintained books of account separately for trading and investments, therefore, it is not possible to bifurcate expenses investments, therefore, it is not possible to bifurcate expenses investments, therefore, it is not possible to bifurcate expenses over taxable and non exempt income. On the other hand, the over taxable and non exempt income. On the other hand, the over taxable and non exempt income. On the other hand, the disallowance made is strictly as per the parame disallowance made is strictly as per the parameters of Section ters of Section 14A r.w.r. 8D. 14A r.w.r. 8D. 6.11 I would like to mention that in the case of appellant for 6.11 I would like to mention that in the case of appellant for 6.11 I would like to mention that in the case of appellant for the AY 2011 the AY 2011-12 to 2013-14, CIT (A) decision in favour of the (A) decision in favour of the appellant mainly on the ground that the appellant had not appellant mainly on the ground that the appellant had not appellant mainly on the ground that the appellant had not earned any exempt income in that year. The earned any exempt income in that year. The above aspects above aspects have not been brought on record at that time. Therefore, I am have not been brought on record at that time. Therefore, I am have not been brought on record at that time. Therefore, I am changing my stand on this issue. Further, in the judgments changing my stand on this issue. Further, in the judgments changing my stand on this issue. Further, in the judgments relied upon by the appellant above aspects have also not been relied upon by the appellant above aspects have also not been relied upon by the appellant above aspects have also not been considered, therefore, with due respect to the judgments, I considered, therefore, with due respect to the judgments, I considered, therefore, with due respect to the judgments, I follow the above analysis made in this order. In view of the follow the above analysis made in this order. In view of the follow the above analysis made in this order. In view of the above discussion, the contentions of the appellant that no above discussion, the contentions of the appellant that no above discussion, the contentions of the appellant that no exempt income has been earned and exempt income has been earned and therefore, provisions of therefore, provisions of section 14A of the Act cannot be invoked, is hereby, rejected. section 14A of the Act cannot be invoked, is hereby, rejected. section 14A of the Act cannot be invoked, is hereby, rejected. 6.12 In view 6.12 In view of the above discussion, the Id. AO was justified of the above discussion, the Id. AO was justified in disallowing expenses by invoking provisions of section 14A in disallowing expenses by invoking provisions of section 14A in disallowing expenses by invoking provisions of section 14A r.w.r 8D of the Act. Thus, addition made by the AO amounting r.w.r 8D of the Act. Thus, addition made by the AO amounting r.w.r 8D of the Act. Thus, addition made by the AO amounting to Rs. 32,90,000 / to Rs. 32,90,000 /- is confirmed. Therefore, appeal on this is confirmed. Therefore, appeal on this ground is dismissed. ground is dismissed.” 5.1 However, we find that the Hon’ble Delhi High Court in the case However, we find that the Hon’ble Delhi High Court in the case However, we find that the Hon’ble Delhi High Court in the case of PCIT Central v. Era Infrastructure (India) Ltd. [2022] 141 PCIT Central v. Era Infrastructure (India) Ltd. [2022] 141 PCIT Central v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi) taxmann.com 289 (Delhi) has held the said amendment of 2022 has held the said amendment of 2022 as prospective. The relevant finding of the Hon’ble High Court he relevant finding of the Hon’ble High Court he relevant finding of the Hon’ble High Court (supra) is reproduced as under: ra) is reproduced as under:

“8. Consequently, this Court is of the view that the 8. Consequently, this Court is of the view that the 8. Consequently, this Court is of the view that the amendment of amendment of Section 14A, which is "for removal of doubts" , which is "for removal of doubts" cannot be presumed to be retrospective even where such cannot be presumed to be retrospective even where such cannot be presumed to be retrospective even where such

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language is used, if it alters or changes the law as it earlier s used, if it alters or changes the law as it earlier s used, if it alters or changes the law as it earlier stood. 9. Though the judgment of this Court has been challenged and 9. Though the judgment of this Court has been challenged and 9. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is is pending adjudication before the Supreme Court, yet there is is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of no stay of the said judgment till date. Consequently, in view of no stay of the said judgment till date. Consequently, in view of the judgments dgments dgments passed passed passed by by by the the the Supreme Supreme Supreme Court Court Court in Kunhayammed and Others vs. State of Kerala and Kunhayammed and Others vs. State of Kerala and Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. , (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. , (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Vs. Church of South India Trust Association CSI Cinod Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1, the present appeal is riat, Madras (1992) 3 SCC 1, the present appeal is riat, Madras (1992) 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the dismissed being covered by the judgment passed by the dismissed being covered by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL & FS learned predecessor Division Bench in PCIT vs. IL & FS learned predecessor Division Bench in PCIT vs. IL & FS Energy Development Company Ltd (supra) and Energy Development Company Ltd (supra) and Cheminvest Limited vs. Commissioner of Income Tax Limited vs. Commissioner of Income Tax-VI, (2015) 378 ITR , (2015) 378 ITR 33. 10. Accordingly, the appeal and application are dismissed. 10. Accordingly, the appeal and application are dismissed. 10. Accordingly, the appeal and application are dismissed. However, it is clarified that the order passed in the present However, it is clarified that the order passed in the present However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court appeal shall abide by the final decision of the Supreme Court appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of PCIT vs. IL & FS Energy in the SLP filed in the case of PCIT vs. IL & FS Energy in the SLP filed in the case of PCIT vs. IL & FS Energy Development Company Ltd (supra). Development Company Ltd (supra).” 5.2 Further the Coordinate Bench of the Tribunal in the case of Further the Coordinate Bench of the Tribunal in the case of Further the Coordinate Bench of the Tribunal in the case of ACIT v. K Raheja Corporate Services Pvt. Ltd. ITA No. ACIT v. K Raheja Corporate Services Pvt. Ltd. ITA No. ACIT v. K Raheja Corporate Services Pvt. Ltd. ITA No. 2527/Mum/2021 for AY 2017 for AY 2017-18 has discussed the i 18 has discussed the issue of disallowance u/s 14A of the Act in the case of no exempted income disallowance u/s 14A of the Act in the case of no exempted income disallowance u/s 14A of the Act in the case of no exempted income in detail and upheld that in such cases no disallowance can be in detail and upheld that in such cases no disallowance can be in detail and upheld that in such cases no disallowance can be made. The relevant finding of the Tribunal is reproduced as under: made. The relevant finding of the Tribunal is reproduced as under: made. The relevant finding of the Tribunal is reproduced as under:

“36. Ground No Ground No. 4 of the appeal is against the Ld 4 of the appeal is against the Ld. CIT(A)’s action of deleting the disallowance made u/s 14A of the Act action of deleting the disallowance made u s 14A of the Act read with Rule 8D. Briefly stated, the assessee holds read with Rule 8D Briefly stated, the assessee holds investments in shares of various group/associate companies, investments in shares of various group associate companies, none of which yielded any exempt income in the AYs 2012-13 none of which yielded any exempt income in the AYs 2012 none of which yielded any exempt income in the AYs 2012 to 2018-19. It It was the case of the assessee that, in absence of was the case of the assessee that, in absence of any exempt income being derived from such investments, the any exempt income being derived from such investments, the any exempt income being derived from such investments, the disallowance u/s 14A of the Act was unwarranted s 14A of the Act was unwarranted. The AO disallowance u

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however relying on the CBDT Circular No. 5/2014 rejected this however relying on the CBDT Circular No 2014 rejected this d made disallowance u/s 14A of contention of the assessee an contention of the assessee and made disallowance u the Act by applying Rule 8D. On appeal, the Ld On appeal, the Ld. CIT(A) the Act by applying Rule 8D deleted the disallowance made by the AO. Aggrieved by the deleted the disallowance made by the AO Aggrieved by the same, the Revenue is now in appeal before us. same, the Revenue is now in appeal before us 37. At the time of hearing, the Ld. CIT, DR supported the At the time of hearing, the Ld CIT, DR supported the of the AO by relying on the CBDT Circular No. 5/2014 order of the AO by relying on the CBDT Circular No of the AO by relying on the CBDT Circular No which states that disallowance u/s 14A of the Act is required which states that disallowance u s 14A of the Act is required to be made, irrespective of whether the investments yielded to be made, irrespective of whether the investments yielded to be made, irrespective of whether the investments yielded exempt income during the year or not. The Ld. CIT, DR further exempt income during the year or not CIT, DR further contended that a ne contended that a new Explanation has been inserted in w Explanation has been inserted in Section 14A of the Act by the Finance Act, 2022, which Section 14A of the Act by the Finance Act, 2022, which Section 14A of the Act by the Finance Act, 2022, which according to him, was applicable retrospectively, and therefore according to him, was applicable retrospectively, and therefore according to him, was applicable retrospectively, and therefore urged that the order of the Ld. CIT(A) be reversed and the urged that the order of the Ld be reversed and the order of the AO be restored. Per contra, the Ld e Ld. AR of the order of the AO be restored assessee relied on the order of the Ld. CIT(A). He contended assessee relied on the order of the Ld He contended that the Explanation inserted in Section 14A of the Act has that the Explanation inserted in Section 14A of the Act has that the Explanation inserted in Section 14A of the Act has been made effective from 01.04.2022 and therefore did not been made effective from 01 2022 and therefore did not apply in the relevant AYs under consideration. Relying on the apply in the relevant AYs under consideration Relying on the judgements of the Hon’ble Supreme Court in the case of M M judgements of the Hon ble Supreme Court in the case of M M Aqua Technologies Ltd Vs CIT (436 ITR 582)&CIT Vs Vatika Aqua Technologies Ltd Vs CIT &CIT Vs Vatika Township Pvt Ltd (367 ITR 466), wherein it has been held that Township Pvt Ltd , wherein it has been held that any legislation which imposes new obligation or new duties or any legislation which imposes new obligation or new duties or any legislation which imposes new obligation or new duties or a new levy shal a new levy shall have to be necessarily treated as prospective l have to be necessarily treated as prospective in nature. 38. We have heard both the parties. Firstly, we deem it fit to We have heard both the parties Firstly, we deem it fit to deal with the CBDT Circular No.5/2014 relied upon by the deal with the CBDT Circular No 2014 relied upon by the Revenue. It is by now well settled in law that any Rule or It is by now well settled in law that any Rule or It is by now well settled in law that any Rule or Circular issued b Circular issued by the CBDT cannot go beyond the literal y the CBDT cannot go beyond the literal language used in the main provision. As a corollary, the language used in the main provision As a corollary, the computation mechanism as set out in Rule 8D of Income Tax computation mechanism as set out in Rule 8D of Income Tax computation mechanism as set out in Rule 8D of Income Tax Rules 1962 (herein after the Rules), cannot go beyond the Rules 1962 , cannot go beyond the ct itself. Going by provision contained in Section 14A of the A provision contained in Section 14A of the Act itself the language employed in Section 14A of the Act, the position the language employed in Section 14A of the Act, the position the language employed in Section 14A of the Act, the position which emerges is that, where the assessee has not earned which emerges is that, where the assessee has not earned which emerges is that, where the assessee has not earned any exempt income, there cannot be “disallowance disallowance” of any exempt income, there cannot be expenditure, as it would result in imposing tax on hypothetical expenditure, as it would result in imposing tax on hypothetical expenditure, as it would result in imposing tax on hypothetical

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income, which is wholly impermissible in law. We find that the income, which is wholly impermissible in law We find that the Hon’ble Delhi High Court in the decision rendered in the case ble Delhi High Court in the decision rendered in the case ble Delhi High Court in the decision rendered in the case of Pr. CIT Vs IL&FS Energy Development Pvt Ltd CIT Vs IL&FS Energy Development Pvt Ltd (399 ITR 483 399 ITR 483) after considering the Board Circular No.5/2014, has upheld after considering the Board Circular No 2014, has upheld the assessee’s contention that, in absence of any exempt the assesse s contention that, in absence of any exempt income earned in the year in question, the disallowance u/s income earned in the year in question, the disallowance u income earned in the year in question, the disallowance u 14A of the Act is unwarranted. The relevant findings of the 14A of the Act is unwarranted The relevant findings of the High Court is as under: High Court is as under “18. The CBDT Circular upon which extensive reliance The CBDT Circular upon which extensive reliance The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D Hossain does not refer to Rule 8D (1) of is placed by the Rules at all but only refers to the word "includible" the Rules at all but only refers to the word the Rules at all but only refers to the word occurring in the title to Rule 8D as well as the title to occurring in the title to Rule 8D as well as the title to occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not Section 14A The Circular concludes that it is not necessary that exempt income should necessarily be necessary that exempt income should necessar necessary that exempt income should necessar included included included in in in a a a particular particular particular year's year's year's income income for income for for the the the disallowance to be triggered. disallowance to be triggered 19. In the considered view of the Court, this will be a In the considered view of the Court, this will be a In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D truncated reading of Section 14 A and Rule 8D truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such particularly when Rule 8D uses the expression 'such previous year'. Further, it does not account for the previous year' Further, it does not account for the concept of 'real income'. It does not note that under concept of 'real income' It does not note that under Section 5 of the Act, the question of taxation of 'notional Section 5 of the Act, the question of taxation of 'notional Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in CIT v As explained in CIT v. Walfort income' does not arise Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 326 ITR 1/192 Share & Stock Brokers Taxman 211 (SC), the mandate of Section 14A of the Taxman 211 , the mandate of Section 14A of the Act is to curb the practice of claiming deduction of Act is to curb the practice of claiming deduction of Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being expenses incurred in relation to exempt income being expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax taxable income and at the same time avail of the tax taxable income and at the same time avail of the tax incentives by way of exemption of exempt income incentives by way of exemption of exempt incentives by way of exemption of exempt without without without making making making any any any apportionment apportionment apportionment of of of expenses expenses expenses incurred in relation to exempt income. Consequently, the incurred in relation to exempt income Consequently, the Court is not persuaded that in view of the Circular of the Court is not persuaded that in view of the Circular of the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court CBDT dated 11th May 2014, the decision of this Court CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration reconsideration. in Cheminvest Ltd 20. In Redington In Redington (India) Ltd. v. Addl. CIT CIT [2017] 392 ITR 633/77 taxmann.com 257 (Mad.), a similar ITR 633 , a similar contention of the Revenue was negated. The Court there contention of the Revenue was negated The Court there

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declined to apply the CBDT Circular by explaining that declined to apply the CBDT Circular by explaining that declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the Section 14A is relatable to the earning of the actual income and not notional income or anticipated actual income and not notional income or anticipated actual income and not notional income or anticipated income.”… income …. 23. The decisions of the ITAT in Ratan Housing The decisions of the ITAT in Ratan Housing The decisions of the ITAT in Ratan Housing Development Ltd. (supra) and Relaxo Footwears Ltd and Relaxo Footwears Ltd. Development Ltd (supra supra), to the extent that they are inconsistent with , to the extent that they are inconsistent with what what has been held hereinbefore do not merit has been held hereinbefore do not merit acceptance. Further, the mere fact that in the audit acceptance Further, the mere fact that in the audit report for the AY in question, the auditors may have report for the AY in question, the auditors may have report for the AY in question, the auditors may have suggested that there should be a disallowance cannot suggested that there should be a disallowance cannot suggested that there should be a disallowance cannot be determinative of the legal position. That would not be determinative of the legal position That would not preclude the Assessee from taking a stand that no eclude the Assessee from taking a stand that no eclude the Assessee from taking a stand that no disallowance under Section 14 A of the Act was called disallowance under Section 14 A of the Act was called disallowance under Section 14 A of the Act was called for in the AY in question because no exempt income was for in the AY in question because no exempt income was for in the AY in question because no exempt income was earned. earned 24. For all of the aforementioned reasons, this Court is For all of the aforementioned reasons, this Court is For all of the aforementioned reasons, this Court is of the view that the CBDT Circular of the view that the CBDT Circular dated 11th May dated 11th May 2014 cannot override the expressed provisions of 2014 cannot override the expressed provisions of 2014 cannot override the expressed provisions of Section 14A read with Rule 8D.” Section 14A read with Rule 8D 39. We may also gainfully refer to the following We may also gainfully refer to the following observations of the Hon’ble Madras High Court in the observations of the Hon ble Madras High Court in the case of Marg Ltd. vs CIT (120 taxmann.com 84 com 84) wherein case of Marg Ltd also the High Court rejected the proposition set out in o the High Court rejected the proposition set out in o the High Court rejected the proposition set out in the Board Circular No. 5/2014 and held that the the Board Circular No 2014 and held that the disallowance of expenditure u/s 14A can never exceed disallowance of expenditure u s 14A can never exceed the amount of exempt income so earned by the the amount of exempt income so earned by the the amount of exempt income so earned by the assessee. The relevant extracts of the decision are as assessee The relevant extracts of the decision are as llows: follows “5. What seems to have caused this continuous problem What seems to have caused this continuous problem What seems to have caused this continuous problem is the CBDT Circular No. 5/2014 dated 11 2014 dated 11-2-2014, is the CBDT Circular No referred to in paragraph 5 of the impugned order of the referred to in paragraph 5 of the impugned order of the referred to in paragraph 5 of the impugned order of the Tribunal dated 6-4-2016 before us in the present case 2016 before us in the present case. Tribunal dated 6 In that Circular, the CBDT has clarified that Rule 8D In that Circular, the CBDT has clarified that Rule 8D In that Circular, the CBDT has clarified that Rule 8D read with Section 14A of the Act provides for read with Section 14A of the Act provides for read with Section 14A of the Act provides for

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disallowance of expenditure even where the taxpayer in disallowance of expenditure even where the taxpayer in disallowance of expenditure even where the taxpayer in a particular year has not earned any exempt income. a particular year has not earned any exempt income a particular year has not earned any exempt income This argument of Revenue, which prevailed with the This argument of Revenue, which prevailed with th This argument of Revenue, which prevailed with th Tribunal, is not at all tenable. Tribunal, is not at all tenable … 12. Another Bench of Madras High Court in the case Another Bench of Madras High Court in the case Another Bench of Madras High Court in the case CIT v. Chettinad Logistics (P.) Ltd. [2017] 80 of CIT taxmann.com 221 248 Taxman 55 wherein the Division taxmann wherein the Division Bench of the Court followed anoth Bench of the Court followed another Division Bench er Division Bench (India) judgement judgement in in the the case case of Redington of Redington Ltd. v v. Addl. CIT [2017] taxmann.com 77 77 taxmann 257 (Mad.) .) and held that the view of the Central Board of and held that the view of the Central Board of Direct Taxes in Circular No. 5 of 2014 dated 11 5 of 2014 dated 11-2-2014, Direct Taxes in Circular No which h which has been relied by the Tribunal in the impugned as been relied by the Tribunal in the impugned order cannot be upheld and the disallowance under order cannot be upheld and the disallowance under order cannot be upheld and the disallowance under section section 14A of the Act cannot go beyond the extent of of the Act cannot go beyond the extent of exempted income itself. Paragraph 12.3 of the said exempted income itself 3 of the said judgement is quoted below for ready reference. judgement is quoted below for ready reference judgement is quoted below for ready reference ……. 13. … …. Unfortunately, the Revenue Authority and the Unfortunately, the Revenue Authority and the Tribunal have read Rule 8D without context and as an Tribunal have read Rule 8D without context and as an Tribunal have read Rule 8D without context and as an independent provision of disallowance, as if it was an independent provision of disallowance, as if it was an independent provision of disallowance, as if it was an island provision of law and the disallowance computed island provision of law and the disallowance computed island provision of law and the disallowance computed as per Rule 8D of the Rules can go beyond the as per Rule 8D of the Rules can go beyond th as per Rule 8D of the Rules can go beyond th exempted income itself and can be added as a taxable exempted income itself and can be added as a taxable exempted income itself and can be added as a taxable income in the hands of the Assessee. Such an income in the hands of the Assessee income in the hands of the Assessee interpretation put by Revenue Authorities is pathetic, to interpretation put by Revenue Authorities is pathetic, to interpretation put by Revenue Authorities is pathetic, to say the least. say the least 14. It is well settled that the Rule cannot go beyond the It is well settled that the Rule cannot go beyond the It is well settled that the Rule cannot go beyond the main parent provision. Therefore, what has been main parent provision erefore, what has been provided as computation method in Rule 8D cannot go provided as computation method in Rule 8D cannot go provided as computation method in Rule 8D cannot go beyond the roof limit of section 14A itself under any beyond the roof limit of section 14A itself under any beyond the roof limit of section 14A itself under any circumstances. The Courts have time and again circumstances The Courts have time and again reiterated this correct, reasonable and clear position of reiterated this correct, reasonable and clear position of reiterated this correct, reasonable and clear position of law. But, merely to som But, merely to somehow make more disallowance ehow make more disallowance and impose tax on the hypothetical income of the and impose tax on the hypothetical income of the and impose tax on the hypothetical income of the

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Assessee, in contrast to the concept of "real income real income" to Assessee, in contrast to the concept of be taxed as per section 5 of the Income- -tax Act, the be taxed as per section 5 of the Income authorities under the Income-tax Act keep on adopting authorities under the Income tax Act keep on adopting such absurd procedures. The disallowance to this such absurd pro The disallowance to this extent, if it was to have its way, will constitute a extent, if it was to have its way, will constitute a extent, if it was to have its way, will constitute a hypothetical 'income' taxable in the hands of the hypothetical 'income' taxable in the hands of the hypothetical 'income' taxable in the hands of the Assessee, which could never be the intention of section Assessee, which could never be the intention of section Assessee, which could never be the intention of section 14A 14A 14A of of of the the the Act, Act, Act, providing providing providing for for for a a a proportionate proportionate proportionate disallowance of e disallowance of expenditure incurred to earn the xpenditure incurred to earn the exempted income. exempted income ….. 22. We, therefore, dispose of the present appeal by We, therefore, dispose of the present appeal by We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee answering question of law in favour of the Assessee answering question of law in favour of the Assessee and against the Revenue and by holding that the and against the Revenue and by holding that the and against the Revenue and by holding that the disallowance under rule 8D of the IT Rules read with disallowance under rule 8D of the IT Rules read wit disallowance under rule 8D of the IT Rules read wit Section 14A of the Act can never exceed the exempted Section 14A of the Act can never exceed the exempted Section 14A of the Act can never exceed the exempted income earned by the Assessee during the particular income earned by the Assessee during the particular income earned by the Assessee during the particular assessment year and further, without recording the assessment year and further, without recording the assessment year and further, without recording the satisfaction by the Assessing Authority that the satisfaction by the Assessing Authority that the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made apportionment of such disallowable expenditure ma apportionment of such disallowable expenditure ma by the Assessee with respect to the exempted income is by the Assessee with respect to the exempted income is by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing not acceptable for reasons to be assigned the Assessing not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method Authority, he cannot resort to the computation method Authority, he cannot resort to the computation method under Rule 8D of the Income-tax Rules, 1962 tax Rules, 1962.” under Rule 8D of the Income 40. It is also noted that the Hon’ble Supreme Court in its It is also noted that the Hon eme Court in its judgement dated08.02.2019 in the case of CIT vs Oil Industry judgement dated08 2019 in the case of CIT vs Oil Industry Board (SLP (Civil) No. 2755/2019) Development Development Board 2755 has dismissed the SLP filed by the Revenue against the judgement dismissed the SLP filed by the Revenue against the judgement dismissed the SLP filed by the Revenue against the judgement of the Hon’ble Delhi High Court dated 16 ble Delhi High Court dated 16.02.2018 by relying 2018 by relying upon its decision in the case of CIT vs Essar Teleholdings s decision in the case of CIT vs Essar Teleholdings s decision in the case of CIT vs Essar Teleholdings Limited (2018 2018) 3 SCC 253. The Hon’ble Delhi High Court had ble Delhi High Court had ruled that, in absence of any exempt income, disallowance u/s ruled that, in absence of any exempt income, disallowance u ruled that, in absence of any exempt income, disallowance u 14A of the Act of any amount was not permissible. In arriving 14A of the Act of any amount was not permissible 14A of the Act of any amount was not permissible at this conclusion, the Hon’ble Delhi High Court had relied at this conclusion, t ble Delhi High Court had relied upon its earlier decision in the case of Cheminvest Ltd. vs CIT upon its earlier decision in the case of Cheminvest Ltd upon its earlier decision in the case of Cheminvest Ltd (378 ITR 33 378 ITR 33). The relevant extracts of the judgement are as The relevant extracts of the judgement are as under:

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“1. The Revenue's appeal challenges an order of the The Revenue's appeal challenges an order of the The Revenue's appeal challenges an order of the Income Tax Appellate Tribunal (ITAT) which had set Income Tax Appellate Tribunal which had set aside the disallowance of Rs. 1,62,49,000 1,62,49,000/- under aside the disallowance of Rs Section 14A of the Income Tax Act, 1961 (hereinafter Section 14A of the Income Tax Act, 1961 Section 14A of the Income Tax Act, 1961 referred to as 'the Act'). referred to as 'the Act' 2. The Assessing Officer The Assessing Officer (AO) and later the CIT and later the CIT (A) made the disallowance by taking into account only the made the disallowance by taking into account only the made the disallowance by taking into account only the investment patterns of the assessee for the concerned investment patterns of the assessee for the concerned investment patterns of the assessee for the concerned assessment. assessment 3. The ITAT relied upon the ruling of this Court The ITAT relied upon the ruling of this Court The ITAT relied upon the ruling of this Court Cheminvest Ltd. v. CIT [2015] 378 ITR 33 in Cheminvest Ltd 378 ITR 33 which ruled ruled ruled in in in the the the absence absence absence of of of any any any exempt exempt exempt income, income, income, disallowance under Section 14-A of the Act of any disallowance under A of the Act of any amount was not permissible. Since the decision amount was not permissible Since the decision Cheminvest Ltd. (supra) was followed, there is no in Cheminvest Ltd was followed, there is no substantial question of law that requires consideration. substantial question of law that requires consideration substantial question of law that requires consideration 4. The appeal is therefore dismissed The appeal is therefore dismissed.” 41. The jurisdictional Bombay The jurisdictional Bombay High Court in the case of High Court in the case of Pr.CIT Vs Kohinoor Project Pvt Ltd CIT Vs Kohinoor Project Pvt Ltd (121 taxmann 121 taxmann.com 177) following the above judgement of Hon’ble Delhi High Court following the above judgement of Hon ble Delhi High Court has also held that in absence of exempt income, no has also held that in absence of exempt income, no has also held that in absence of exempt income, no disallowance is warranted u/s 14A of the Act. . The relevant disallowance is warranted u findings of the Hon’ble High Court are as follows: findings of the Hon “6. Aggrieved by the reduction in the quantum of Aggrieved by the reduction in the quantum of Aggrieved by the reduction in the quantum of disallowance revenue preferred appeal before the disallowance revenue preferred appeal before the disallowance revenue preferred appeal before the Tribunal. The Tribunal considered the contention of the Tribunal The Tribunal considered the contention of the assessee that no exempt income was claimed by the assessee that no exempt income was claimed by the assessee that no exempt income was claimed by the assessee under section 14A of the Act and, therefore, no ssessee under section 14A of the Act and, therefore, no ssessee under section 14A of the Act and, therefore, no disallowance could have been made by the Assessing disallowance could have been made by the Assessing disallowance could have been made by the Assessing Officer by invoking section 14A together with Rule Officer by invoking section 14A together with Rule Officer by invoking section 14A together with Rule 8D(2)( )(ii) of the Income-tax Rules, 1962. Tribunal relied Tribunal relied upon the decision of the Delhi High Court upon the decision of the Delhi High Court in the case of in the case of Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 com 118/234 Cheminvest Ltd Taxman 761/378 ITR 33 (Delhi); the decision of the Taxman 761 ; the decision of the Punjab and Haryana High Court in CIT v. Lakhani Punjab and Haryana High Court in CIT v Punjab and Haryana High Court in CIT v

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Inc. [2014] 49 taxmann.com 257/226 Marketing Marketing Inc com 257 Taxman 45 (Mag.); and decision of the Allah Taxman 45 ; and decision of the Allahabad High Court in the case of CIT v. Shivam Motors Shivam Motors (P.) Ltd. Court in the case of CIT v [2015] 2015] 55 taxmann.com 262/230 Taxman 63 230 Taxman 63 (All.) and observed that there is uniformity in the view that in observed that there is uniformity in the view that in observed that there is uniformity in the view that in case there is no exempt income claimed by the assessee case there is no exempt income claimed by the assessee case there is no exempt income claimed by the assessee in the return of income, no disall in the return of income, no disallowance can be made owance can be made by the revenue. Consequently, vide order dated 18 Consequently, vide order dated 18-10- by the revenue 2016 Tribunal dismissed the appeal of the revenue.” 2016 Tribunal dismissed the appeal of the revenue 2016 Tribunal dismissed the appeal of the revenue 42. The above proposition may also be viewed from another The above proposition may also be viewed from another The above proposition may also be viewed from another angle. It is noted that several judicial forums inter alia It is noted that several judicial forums inter alia It is noted that several judicial forums inter alia including the Hon’ble Supreme Court have held that the including the ble Supreme Court have held that the disallowance computed u/s 14A read with Rule 8D, cannot disallowance computed u s 14A read with Rule 8D, cannot exceed the amount of exempt income. In the facts of the exceed the amount of exempt income In the facts of the present case, admittedly the exempt income earned by the present case, admittedly the exempt income earned by the present case, admittedly the exempt income earned by the assessee was NIL. As a corollary, therefore, no disallowance assessee was NIL o disallowance could have been made u/s 14A of the Act. The relevant could have been made u The relevant judgements in this regard, are as under: judgements in this regard, are as under (i) The Hon The Hon’ble Supreme Court in the case of Maxopp ble Supreme Court in the case of Maxopp Investment Ltd Vs CIT(402 ITR 640) which is set out Investment Ltd Vs CIT which is set out hereunder: hereunder “40. We note from the facts in We note from the facts in the State Bank of Patiala the State Bank of Patiala cases that the AO, while passing the assessment order, cases that the AO, while passing the assessment order, cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount had already restricted the disallowance to the amount had already restricted the disallowance to the amount which was claimed as exempt income by applying the which was claimed as exempt income by applying the which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding formula contained in Rule 8D of the Rules and holding formula contained in Rule 8D of the Rules and holding of the Act would be applicable. In spite that section 14A that section 14A of the Act would be applicable of this exercise of apportionment of expenditure carried of this exercise of apportionment of expenditure carried of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of out by the AO, CIT disallowed the entire deduction of expenditure. That view of the CIT(A) ) was clearly expenditure untenable and rightly set aside by the ITAT. Therefore, untenable and rightly set aside by the ITAT untenable and rightly set aside by the ITAT on facts, the Punjab and Haryana High Court has on facts, the Punjab and Haryana High Court has on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of arrived at a correct conclusion by affirming the view of arrived at a correct conclusion by affirming the view of the ITAT though we are not subscribing to the theory of the ITAT though we are not subscribing to the theory of the ITAT though we are not subscribing to the theory of dominant intention applied by the High Court.” dominant intention applied by the High Court dominant intention applied by the High Court

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(ii) The Hon The Hon’ble Delhi High Court in the case of PCIT vs se of PCIT vs DLF Home Developers Ltd. (114 taxmann.com 97 com 97) also DLF Home Developers Ltd restricted the disallowance u/s 14A to the extent of restricted the disallowance u s 14A to the extent of exempt income earned during the year. The relevant exempt income earned during the year The relevant extracts of the said decision are as follows: extracts of the said decision are as follows “2. As far as first issue As far as first issue - disallowance under Section under Section 14A is concerned, the Court notices that the exempted 14A is concerned, the Court notices that the exempted 14A is concerned, the Court notices that the exempted income in this case is Rs. 3.17 lakhs. The Assessing income in this case is Rs The Assessing Officer had disallowed Rs. 59 crores which was Officer had disallowed Rs 59 crores which was reduced to Rs. 8 crores by the CIT(A). Following the reduced to Rs Following the decision of this court in Joint Investments (P P.) Ltd. v. CIT decision of this court in Joint Investments [2015] 2015] 59 taxmann.com 295/233 Taxman 117 233 Taxman 117/372 ITR 694, the ITAT restricted the disallowance to the income 694, the ITAT restricted the disallowance to the income 694, the ITAT restricted the disallowance to the income earned i.e. Rs. 3.17 lakhs. So, there is no infirmity in earned i So, there is no infirmity in this approach. No question of law arises.” this approach 43. The SLP filed by the Revenue against the above The SLP filed by the Revenue against the above The SLP filed by the Revenue against the above judgement has since been dismissed by the Hon’ ’ble Supreme judgement has since been dismissed by the Hon Court vide its order dated 26.08.2019 (114 taxmann 114 taxmann.com 98) Court vide its order dated 26 and therefore the decision of Delhi High Court has attained and therefore the decision of Delhi High Court has attained and therefore the decision of Delhi High Court has attained finality. (iii) The Hon’ble Madras High Court in the case of ble Madras High Court in the case of Chettinad Logistics Pvt Ltd. vs CIT (257 Taxman 2 257 Taxman 2) Chettinad Logistics Pvt Ltd observed as under: observed as under “8. According to us, this exercise, in the given facts According to us, this exercise, in the given facts According to us, this exercise, in the given facts which which which emerge emerge emerge from from from the the the record, record, record, was was was clearly clearly clearly unnecessary, as the CIT(A) had returned the finding of unnecessary, as the CIT returned the finding of fact that no dividend had been earned in the relevant fact that no dividend had been earned in the relevant fact that no dividend had been earned in the relevant assessment year, with which, we are concerned, in the assessment year, with which, we are concerned, in the assessment year, with which, we are concerned, in the present appeal. present appeal 9. In our opinion Section 14 A of the Act, can only be In our opinion Section 14 A of the Act, can only be In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off triggered, if, the Assessee seeks to square off triggered, if, the Assessee seeks to square off expenditure against income which does not form part of nditure against income which does not form part of nditure against income which does not form part of the total income under the Act. the total income under the Act

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9.1 The legislature, in order to do away with the The legislature, in order to do away with the The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim pernicious practice adopted by the Assessees', to claim pernicious practice adopted by the Assessees', to claim expenditure, expenditure, expenditure, against against against income income income exempt exempt exempt from from from tax, tax, tax, introduced the said provision. introduced the said pr 10. In the instant case, there is no dispute that no In the instant case, there is no dispute that no In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income i , dividend, which did not form part of total income of the Assessee was earned in the relevant income of the Assessee was earned in the relevant income of the Assessee was earned in the relevant assessment year. assessment year 10.1 Therefore, to our minds, the addition made by the Therefore, to our minds, the addition made by the Therefore, to our minds, the addition made by the Assessing Office Assessing Officer by relying upon Section 14 A of the r by relying upon Section 14 A of the Act, was completely contrary to the provisions of the Act, was completely contrary to the provisions of the Act, was completely contrary to the provisions of the said Section. said Section …….. 11. Furthermore, we may note that a similar argument Furthermore, we may note that a similar argument Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the was sought to be advanced by the Revenue in the was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd Ltd. v. Addl. matter concerning, CIT [2017 2017] 77 taxmann.com 257 (Mad.) which was, subject matter of T.C.A.No.520 of 2016. subject matter of T 11.1 A Co A Co-ordinate Bench of this Court, vide judgement ordinate Bench of this Court, vide judgement dated 23.12.2016, rejected the plea of the Revenue dated 23 2016, rejected the plea of the Revenue advanced in that behalf. advanced in that behalf 11.2 As a matter of fact, a perusal of the judgement As a matter of fact, a perusal of the judgement As a matter of fact, a perusal of the judgement would show that the Revenue had sought to argue that would show that the Revenue had sought to argue that would show that the Revenue had sought to argue that because exempt income could be earned in future years, because exempt income could be earned in future years, because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of therefore, recourse could be taken to the provisions of therefore, recourse could be taken to the provisions of iture. In other Section 14A of the Act, to disallow expend Section 14A of the Act, to disallow expenditure words the stand taken by the Revenue was irrespective words the stand taken by the Revenue was irrespective words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the of the fact whether or not income was earned in the of the fact whether or not income was earned in the concerned assessment year expenditure under Section concerned assessment year expenditure under Section concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 14A could be disallowed against anticipated income 14A could be disallowed against anticipated income 11.3 Pertinently, the Division Pertinently, the Division Bench in Bench in Redington (India) )Ltd. (supra) case has repelled this precise case has repelled this precise argument. argument

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“Explanation Explanation.—For the removal of doubts, it is hereby For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary clarified that notwithstanding anything to the contrary clarified that notwithstanding anything to the contrary contained in this contained in this Act, the provisions of this section shall Act, the provisions of this section shall apply and shall be deemed to have always applied in a apply and shall be deemed to have always applied in a apply and shall be deemed to have always applied in a case where the income, not forming part of the total case where the income, not forming part of the total case where the income, not forming part of the total income under this Act, has not accrued or arisen or has income under this Act, has not accrued or arisen or has income under this Act, has not accrued or arisen or has not been received during the previous year relevant to not been received during the previous year relevan not been received during the previous year relevan an assessment year and the expenditure has been an assessment year and the expenditure has been an assessment year and the expenditure has been incurred during the said previous year in relation to incurred during the said previous year in relation to incurred during the said previous year in relation to such income not forming part of the total income." such income not forming part of the total income such income not forming part of the total income 46. In this regard, useful reference can be made to the In this regard, useful reference can be made to the In this regard, useful reference can be made to the decision of the Hon’ble Supreme Court in the case of M he case of M/s M.M. decision of the Hon Aqua Technologies Ltd. vs. CIT (supra), in particular Para 22 Aqua Technologies Ltd , in particular Para 22 thereof, wherein the Hon’ble Supreme Court has held that if thereof, wherein the Hon ble Supreme Court has held that if the retrospectivity of a taxing statute is urged due to the use of the retrospectivity of a taxing statute is urged due to the use of the retrospectivity of a taxing statute is urged due to the use of the expression “for the removal of doubts” in the Statute, it the expression he Statute, it cannot be presumed to be retrospective, if it alters or changes cannot be presumed to be retrospective, if it alters or changes cannot be presumed to be retrospective, if it alters or changes the law as it stood earlier. The relevant extracts of the the law as it stood earlier The relevant extracts of the decision of the Hon’ble Apex Court is as under: decision of the Hon "22. Second, a retrospective provision in a tax act which Second, a retrospective provision in a tax act which Second, a retrospective provision in a tax act which is 'for the r is 'for the removal of doubts' cannot be presumed to be emoval of doubts' cannot be presumed to be retrospective, even where such language is used, if it retrospective, even where such language is used, if it retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was alters or changes the law as it earlier stood alters or changes the law as it earlier stood stated in Sedco Forex International Drill. Inc. vs. stated in Sedco Forex International Drill stated in Sedco Forex International Drill CIT (2005 2005) 12 SCC 717 as follows: 17. As was affirmed by this Court in Goslino Mario As was affirmed by this Court in Goslino Mario As was affirmed by this Court in Goslino Mario [(2000 2000) 10 SCC 165] a cardinal principle of the tax law a cardinal principle of the tax law is that the law to be applied is that which is in force in is that the law to be applied is that which is in force in is that the law to be applied is that which is in force in the the the relevant relevant relevant assessment assessment assessment year year year unless unless unless otherwise otherwise otherwise expressly or by necessary implication. (See provided provided expressly or by necessary implication Reliance Jute and Industries Ltd. v. CIT CIT [(1980) 1 also Reliance Jute and Industries Ltd SCC 139].) An Explanation to a statutory provision may SCC 139 An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the fulfil the purpose of clearing up an ambiguity in the fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen main provision or an Explanation can add to and widen main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v See Sonia Bhatia v. State the scope of the main section of U.P P., (1981) 2 SCC 585, 598]. If it is in its nature If it is in its nature clarificatory then the Explanation must be read into the clarificatory then the Explanation must be read into the clarificatory then the Explanation must be read into the

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main provision with effect from the time that the main main provision with effect from the time that the main main provision with effect from the time that the main provision came into force [See Shyam Sunder v Shyam Sunder v. Ram provision came into force Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Kumar Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; 1 SCC 352, 354; CIT v. Laxman Das v Podar Cement (P) Ltd., (1997) 5 SCC 482, 506 482, 506]. But if it Podar Cement changes the law it is not presumed to be retrospective, changes the law it is not presumed to be retrospective, changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is irrespective of the fact that the phrases used are irrespective of the fact that the phrases used are declared" or "for the removal of doubts". declared 18. There was and is no ambiguity in the main There was and is no ambiguity in the main There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the provision of It includes salaries in the total income of an assessee if the assessee has earned total income of an assessee if the assessee has earned total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially it in India had been judicially defined in S.G. Pgnatale [(1980) 124ITR 391 124ITR 391 (Guj)] by defined in S the High Court of Gujarat, in our view, correctly, to he High Court of Gujarat, in our view, correctly, to he High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India arising or accruing in India". The mean as income amendment to the section by way of an Explanation in amendment to the section by way of an Explanation in amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial 1983 effected a change in the scope of that judicial 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, definition so as to include with effect from 1 definition so as to include with effect from 1 "income payable for service rendered in India income payable for service rendered in India". income payable for service rendered in India 19. When the Explanation seeks to give an artificial When the Explanation seeks to give an artificial When the Explanation seeks to give an artificial meaning to "earned in India" and brings about a meaning to and brings about a change effectively in the existing law and in addition change effectively in the existing law and in addition change effectively in the existing law and in addition is stated to come into force with effect from a stated to come into force with effect from a stated to come into force with effect from a future date, there is no principle of interpretation which would date, there is no principle of interpretation which would date, there is no principle of interpretation which would justify justify justify reading reading reading the the the Explanation Explanation Explanation as as as operating operating operating retrospectively. retrospectively 23. This being the case, Explanation 3C is clarificatory This being the case, Explanation 3C is clarificatory - This being the case, Explanation 3C is clarificatory it explains Section 43B(d) as it originally stood and it explains as it originally stood and does not purport to add a new condition retrospectively, does not purport to add a new condition retrospectively, does not purport to add a new condition retrospectively, as has wrongly been held by the High Court. as has wrongly been held by the High Court as has wrongly been held by the High Court 24. Third, any ambiguity in the language of Explanation Third, any ambiguity in the language of Explanation Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per 3C shall be resolved in favour of the assessee as per 3C shall be resolved in favour of the assessee as per v. Cape Cape Bran Brandy Syndicate Inland Inland Revenue Revenue Commissioner (supra) as followed by judgments of this Commissioner as followed by judgments of this Court - See Vodafone International Holdings BV v See Vodafone International Holdings BV v. Court Union of India, (2012) 6 SCC 613 at paras 60 to 70 per Union of India 6 SCC 613 at paras 60 to 70 per

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Kapadia, C.J. and para 333, 334 per Radhakrishnan, Kapadia, C and para 333, 334 per Radhakrishnan, J." 47. According to Ld. AR, therefore the amendment brought According to Ld AR, therefore the amendment brought in by Finance Act, 2022 cannot be said to be retrospective and in by Finance Act, 2022 cannot be said to be retrospective and in by Finance Act, 2022 cannot be said to be retrospective and for that proposition he cited the Constitution Bench decision of for that proposition he cited the Constitution Bench decision of for that proposition he cited the Constitution Bench decision of the Hon’ble Supreme Court in the case of CIT vs. Vatika ble Supreme Court in the case of CIT vs Township Pvt. Ltd. (supra) wherein it was held as under wherein it was held as under: Township Pvt “42.1. " . "Notes on Clauses" appended to the Finance Bill, appended to the Finance Bill, 2002 while proposing insertion of proviso categorically 2002 while proposing insertion of proviso categorically 2002 while proposing insertion of proviso categorically states that 'this amendment will take effect from states that 'this amendment will take effect from states that 'this amendment will take effect from 1.6.2002 2002.' These become epigraphic 1 words, when ' These become epigraphic 1 words, when seen seen seen in in in contradistinction contradistinction contradistinction to to to other other other amendments amendments amendments specifically specifically specifically stating stating stating those those those to to to be be be clarificatory clarificatory clarificatory or or or retrospectively retrospectively retrospectively depicting depicting depicting clear clear clear intention intention intention of of of the the the legislature. It can be seen from the same notes that a legislature It can be seen from the same notes that a few other amendm few other amendments in the Income tax Act made by ents in the Income tax Act made by the the same Finance same Act specifically specifically making making those those amendments retrospective. For example, clause 40 amendments retrospective For example, clause 40 seeks to amend S. 92-F. Clause (iii-a) of of S. 92-F is seeks to amend amended "so as to clarify that the activities mentioned amended so as to clarify that the activities mentioned in the said clause include the carrying out of any work in the said clause include the carrying out of any work in the said clause include the carrying out of any work in pursuance of a contract". (emphasis supplied emphasis supplied). This in pursuance of a contract amendment amendment amendment takes takes takes effect effect effect retrospectively retrospectively retrospectively from from from 01.04. .2002. Various other amendments also take place Various other amendments also take place retrospectively. The Notes on Clauses show that the retrospectively The Notes on Clauses show that the legislature is fully aware of three concepts: legislature is fully aware of three concepts i) prospective amendment with effect from a fixed prospective amendment with effect from a fixed prospective amendment with effect from a fixed date; ii) ) retrospective amendment with effect from a fixed retrospective amendment with effect from a fixed anterior date; and anterior date; and iii) clarificatory amendments which are retrospective in clarificatory amendments which are retrospective in clarificatory amendments which are retrospective in nature." nature 48. The above judgement of the Hon’ble Supreme Court The above judgement of the Hon ble Supreme Court was also taken note of by the Hon’ble Supreme Court in the was also taken note of by the Hon ble Supreme Court in the case of M/ case of M/s Snowtex Investment Ltd. vs. . PCIT dated

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30.04.2019 2019 [Civil Appeal No(s). 4483 of 2019, Special Leave 4483 of 2019, Special Leave to appeal (c) ) No. 20017/2017] wherein the Hon’ ’ble Supreme Court has explained the test to be applied to find out whether Court has explained the test to be applied to find out whether Court has explained the test to be applied to find out whether the intent of the Legislature/Parliament is to give retrospective the intent of the Legisl Parliament is to give retrospective operation of law and accordingly held as under: operation of law and accordingly held as under “The Test to be applied is essentially one of the intent of The Test to be applied is essentially one of the intent of The Test to be applied is essentially one of the intent of the legislature. the legislature 28. In a more recent decision in Commissioner of Income In a more recent decision in Commissioner of Income In a more recent decision in Commissioner of Income Tax vs. Vatika Township Pvt. Ltd. (2015) ) 1 SCC 1, a Tax vs Constitution Bench of this Court held thus: Constitution Bench of this Court held thus 29. In M In M/s. Vijay Industries (supra), decided on 1 March , decided on 1 March 2019, a three judge Bench of this Court held that the 2019, a three judge Bench of this Court held that the 2019, a three judge Bench of this Court held that the provisions of Section 80AB which were introduced by provisions of Section 80AB which were introduced by provisions of Section 80AB which were introduced by the Finance (No. the Finance 2) Act, 1980 Act, 1980 with effect from 1 April 1981 could not be with effect from 1 April 1981 could not be regarded as clarificatory in nature. The Court held that regarded as clarificatory in nature The Court held that the provision was made with prospective effect and the the provision was made with prospective effect and the the provision was made with prospective effect and the amendment would not apply to assessment year 1979- amendment would not apply to assessment year 1979 amendment would not apply to assessment year 1979 1980 and 1980-1981 because the amended provision 1980 and 1980 1981 because the amended provision was brought on the statute book after the assessment s brought on the statute book after the assessment s brought on the statute book after the assessment years in question. years in question 30. In In In conclusion, conclusion, conclusion, we we we therefore, therefore, therefore, hold hold hold that that that the the the amendment which was brought by Parliament to the amendment which was brought by Parliament to the amendment which was brought by Parliament to the Explanation to Section 73 by the Finance (No 2) Act Explanation to Section 73 by the Finance Explanation to Section 73 by the Finance 2014 was with effect from 1 April 2015. In its legislative 2014 was with effect from 1 April 2015 In its legislative wisdom, the Parliament amended Section 43(5) with wisdom, the Parliament amended Section 43 wisdom, the Parliament amended Section 43 effect from 1 April 2006 in relation to the business of effect from 1 April 2006 in relation to the business of effect from 1 April 2006 in relation to the business of trading in derivatives, Parliament brought about a trading in derivatives, Parliament brought about a trading in derivatives, Parliament brought about a specific amendment in the Explanation to Section 73, specific amendment in the Explanation to Section 73, specific amendment in the Explanation to Section 73, insofar as trading in sha insofar as trading in shares is concerned, with effect res is concerned, with effect from 1 April 2015. The latter amendment was intended from 1 April 2015 The latter amendment was intended to take effect from the date stipulated by Parliament to take effect from the date stipulated by Parliament to take effect from the date stipulated by Parliament and we see no reason to hold either that it was and we see no reason to hold either that it was and we see no reason to hold either that it was clarificatory or that the intent of Parliament was to give clarificatory or that the intent of Parliament was to give clarificatory or that the intent of Parliament was to give it retrospective effect. it retrospec

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2.Over the years, disputes have arisen in respect of Over the years, disputes have arisen in respect of Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the issue whether disallowance under section 14A of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income the Act can be made in cases where no exempt inc the Act can be made in cases where no exempt inc has accrued, arisen or received by the assessee during has accrued, arisen or received by the assessee during has accrued, arisen or received by the assessee during an assessment year. an assessment year 3.CBDT issued Circular No CBDT issued Circular No. 5/2014, dated 2014, dated 11/02/ /2014, clarifying that Rule 8D read with 2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of section 14A of the Act provides for disallowance of section 14A of the Act provides for disallowance of the expenditure the expenditure even where tax payer in a particular even where tax payer in a particular year has not earned any exempt income. However, still year has not earned any exempt income However, still some courts have taken a view that if there is no some courts have taken a view that if there is no some courts have taken a view that if there is no exempt income during a year, no disallowance under exempt income during a year, no disallowance under exempt income during a year, no disallowance under section 14A of the Act can be made for that year. section 14A of the Act can be made for tha section 14A of the Act can be made for tha Such an interpretation is not in line with the intention of Such an interpretation is not in line with the intention of Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, the legislature To illustrate, if during a previous year, an assessee incurs an expense of Rs.1 lakh to earn an assessee incurs an expense of Rs 1 lakh to earn non-exempt income of Rs exempt income of Rs.1.5 lakh and also incurs an 5 lakh and also incurs an expense of 20,000/-to earn exempt income which may expense of 20,000 rn exempt income which may or may not have accrued/received during the year received during the year. By or may not have accrued holding that provisions of section 14A of the Act does holding that provisions of section 14A of the Act does holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not apply in this year as the exempt income was not apply in this year as the exempt income was not accrued/received during the year, it amounts to not accrued received during the year, it amounts to holding that Rs.20,000/-would be allowed as holding that Rs would be allowed as deduction against non-exempt income of Rs exempt income of Rs.1.5 Lakh deduction against non even though this expense was not incurred wholly even though this expense was not incurred wholly even though this expense was not incurred wholly and exclusively for the purpose of earning non- and exclusively for the purpose of earning non and exclusively for the purpose of earning non exempt income. Such an interpretation exempt income Such an interpretation defeats the legislative intent of both section 14A as well as legislative intent of both section 14A as well as legislative intent of both section 14A as well as section 37 of the Act. section 37 of the Act 4.In order to make the intention of the legislation clear In order to make the intention of the legislation clear In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is and to make it free from any misinterpretation, it is and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the proposed to insert an Explanation to section 14A of proposed to insert an Explanation to section 14A of Act to clarify that notwithstanding anything to the Act to clarify that notwithstanding anything to the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this contrary contained in this Act, the provisions of this contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always section shall apply and shall be deemed to have always section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued applied in a case where exempt income has not accrued applied in a case where exempt income has not accrued or arisen or has not been rece or arisen or has not been received during the previous ived during the previous year relevant to an assessment year and the year relevant to an assessment year and the year relevant to an assessment year and the

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expenditure has been incurred during the said expenditure has been incurred during the said expenditure has been incurred during the said previous year in relation to such exempt income. previous year in relation to such exempt income previous year in relation to such exempt income 5. This amendment will take effect from 1st April, 2022 This amendment will take effect from 1st April, 2022. This amendment will take effect from 1st April, 2022 6.It is also proposed t It is also proposed to amend sub-section section (1) of the said section, so as to include a non-obstante clause in said section, so as to include a non obstante clause in respect of other provisions of the Income- -tax Act and respect of other provisions of the Income provide that no deduction shall be allowed in provide that no deduction shall be allowed in provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything relation to exempt income, notwithstanding anything relation to exempt income, notwithstanding anything to the contrary contained in this Act. to the 7.This amendment will take effect from 1st April, 2022 This amendment will take effect from 1st April, 2022 This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment and will accordingly apply in relation to the assessment and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years 23 and subsequent assessment years.” year 2022 51. It is further noted the Notes of Clauses of Finance Act, It is further noted the Notes of Clauses of Finance Act, It is further noted the Notes of Clauses of Finance Act, 2022, is explicitly clear that the new Explanation will take 2022, is explicitly clear that the new Explanation will take 2022, is explicitly clear that the new Explanation will take effect from 1st April, 2022 and therefore will accordingly effect from 1st April, 2022 and therefore will accordingly effect from 1st April, 2022 and therefore will accordingly apply to the Assessment Year 2022-23 and subsequent years 23 and subsequent years. apply to the Assessment Year 2022 The relevant Notes to Clauses are as under: The relevant Notes to Clauses are as under “Clause 9 seeks to amend section 14A of the Income-tax Clause 9 seeks to amend section 14A of the Income Act relating to expenditure incurred in relation to income Act relating to expenditure incurred in relation to income Act relating to expenditure incurred in relation to income not includible in total income. The said section, inter The said section, inter- not includible in total income alia, provides that no deduction shall be allowed in alia, provides that no deduction shall be allowed in alia, provides that no deduction shall be allowed in relation to income which does not form part of the total relation to income which does not form part of the total relation to income which does not form part of the total income under the Income-tax Act. It is proposed to income un It is proposed to amend sub-section (1) of the said section to amend sub of the said section to provide that notwithstanding anything to the contrary provide that notwithstanding anything to the contrary provide that notwithstanding anything to the contrary contained in this Act, for the purpose of computing the contained in this Act, for the purpose of computing the contained in this Act, for the purpose of computing the total income, no deduction shall be allowable in respect total income, no deduction shall be allowable total income, no deduction shall be allowable of expenditure incurred in relation to income which does of expenditure incurred in relation to income which does of expenditure incurred in relation to income which does not form part of the total income. not form part of the total income This amendment will take effect from 1st April, 2022 This amendment will take effect from 1st April, 2022 This amendment will take effect from 1st April, 2022 and and and will, will, will, accordingly, accordingly, accordingly, apply apply apply in in in relation relation relation to to to the the the 2022-2023 assessment assessment year year 2022 2023 and and subsequent subsequent assessment years. assessment

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It is also proposed to insert an Explanation to the It is also proposed to insert an Explanation to the It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything said section to clarify that notwithstanding anything said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of to the contrary contained in this Act, the provisions of to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to the said section shall apply and shall be deemed to the said section shall apply and shall be deemed to have been always have been always applied in a case where the income, applied in a case where the income, not forming part of the total income, has not accrued or not forming part of the total income, has not accrued or not forming part of the total income, has not accrued or arisen or has not been received during the previous year arisen or has not been received during the previous year arisen or has not been received during the previous year relevant to an assessment year and the expenditure relevant to an assessment year and the expenditure relevant to an assessment year and the expenditure has been incurred during the said previous year in has been incurred during the said previous year in has been incurred during the said previous year in tion to such income not form part of the total income. relation to such income not form part of the total income tion to such income not form part of the total income This amendment will take effect from 1st April, 2022.” This amendment will take effect from 1st April, 2022 This amendment will take effect from 1st April, 2022 52. From the above, the legislative intent is clear, the From the above, the legislative intent is clear, the From the above, the legislative intent is clear, the amendment brought in by the Finance Act, 2022 on this issue amendment brought in by the Finance Act, 2022 on this issue amendment brought in by the Finance Act, 2022 on this issue as discussed, will take effe as discussed, will take effect from First April 2022 and not ct from First April 2022 and not before as contended by the Ld DR. In our considered view, before as contended by the Ld DR In our considered view, therefore, the new Explanation inserted in Section 14A of the therefore, the new Explanation inserted in Section 14A of the therefore, the new Explanation inserted in Section 14A of the Act with effect from 01-04-2022 cannot be applied in the Act with effect from 01 2022 cannot be applied in the assessment years under consideration for the p assessment years under consideration for the present case as resent case as it is for AYs 2016-17 to 2018-19, and therefore according to it is for AYs 2016 19, and therefore according to us, the decisions cited in Paras 33 to 37 above continue to us, the decisions cited in Paras 33 to 37 above continue to us, the decisions cited in Paras 33 to 37 above continue to hold good and are binding upon us." hold good and are binding upon us 5.3 Further, the Co Further, the Co-ordinate Bench of the Tribunal in the case of ordinate Bench of the Tribunal in the case of Dy. CIT v. Lodha Developers Ltd. [2022] 143 taxmann.com 442 evelopers Ltd. [2022] 143 taxmann.com 442 evelopers Ltd. [2022] 143 taxmann.com 442 (Mumbai-Trib.) has also held that amendment made by the Finance ) has also held that amendment made by the Finance ) has also held that amendment made by the Finance Act, 2022 to section 14A is Act, 2022 to section 14A is to take effect from 01.10.2022 take effect from 01.10.2022 and it would be prospective in nature. Since would be prospective in nature. Since the assessment year the assessment year under consideration is AY 2017 2017-18 , which is much prior to introduction , which is much prior to introduction amendment to section 14A though Finance Act, 2022 therefore, amendment to section 14A though Finance Act, 2022 amendment to section 14A though Finance Act, 2022 respectively following the finding in judicial precedents referred respectively following the finding in judicial precedents respectively following the finding in judicial precedents above, we set aside the finding of the Ld. CIT(A) on the issue in , we set aside the finding of the Ld. CIT(A) on the issue in , we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete the disallowance made by the Assessing Officer. te the disallowance made by the Assessing Officer. te the disallowance made by the Assessing Officer. The grounds of appeal of the assessee are accordingly allowed. The grounds of appeal of the assessee are accordingly allowed. The grounds of appeal of the assessee are accordingly allowed.

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Order pronounced in the open Court on nounced in the open Court on 31/07/2023. /07/2023. Sd/ Sd/- Sd/- (KAVITHA RAJAGOPAL KAVITHA RAJAGOPAL) (OM PRAKASH KANT PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 31/07/2023 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, BY ORDER, //True Copy// (Assistant Registrar) (Assistant Registrar) ITAT, Mumbai ITAT, Mumbai