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Income Tax Appellate Tribunal, ‘A’ BENCH, KOLKATA
Before: Shri Rajpal Yadav, Vice- & Shri Rajesh Kumar
Per Shri Rajpal Yadav, Vice-President (KZ):- The present appeal is directed at the instance of assessee against the order of ld. Principal Commissioner
Assessment Year : 2014-2015 Graphite India Limited of Income Tax-4, Kolkata dated 13h February, 2019 passed under section 263 of the Income Tax Act, 1961.
Though the assessee has taken ten grounds of appeal, but in brief, its grievance is that the ld. Pr. CIT has erred in taking cognizance under section 263 of the Income Tax Act and thereby setting aside the assessment order dated 23.12.2016 passed under section 143(3) of the Income Tax Act, 1961.
Brief facts of the case are that the assessee- company has filed its return of income electronically on 29.11.2014 declaring total income of Rs.206,79,04,516/- and book profit under section 115JB at Rs.257,15,64,501/-. The assessee-company at the relevant time was engaged in manufacture and sale of Calcined Petroleum Coke and Graphite Electrodes and Generation of Power. The ld. Assessing Officer has selected the return for scrutiny assessment and completed the assessment order under section 143(3) on 23.12.2016.
4. The ld. Pr. Commissioner of Income Tax perused the record and formed an opinion that the assessment order is erroneous and prejudicial to the interest of revenue. The ld. Pr. Commissioner has assigned the following Assessment Year : 2014-2015 Graphite India Limited reasons incorporated in paragraph no. 2 of the impugned order. The relevant details read as under:- “2. Subsequently, the assessment records of the assessee were called for & on the basis of the verification of the material available on records, it was found that the order of assessment was erroneous so far as it is prejudicial to the interest of revenue on the following grounds:- (a)Disallowance u/s 14A of the Act was not made by the A.O. keeping in view the circular No. 5/2014 (F.No. 225/182/2013-ITA.II) dated 11-02-2014 as well as provisions laid down in the Act. (b)One of the reasons for selection of scrutiny was mismatch in amount paid to related persons u/s 40A(2)(b) reported in Audit report (Form 3CEB) and ITR. However, the case was not referred to TPO. /As per Para 3.2 of CBDT's Instruction No. 3 of 2016, the instant case had to be mandatorily referred to the TPO (the Transfer Pricing Officer) by the A.O after obtaining the approval of Principal CIT. However, the A.O has completed assessment u/s 143(3) of the Act on 23-12-2016 without referring the matter to Transfer Pricing Officer. (c)It is seen that capital work-in-progress rose from Rs. 252.86 Lakh to Rs. 338.29 Lakh but finance cost capitalized fell from 130.91 Lakh to Zero. The same was not verified by the A.O. (d)It is further noticed that examination of Schedule BP was one of the criteria for selection of this case. However, no such verification was made by the A.O. In fact, breakup of miscellaneous expenses was not called for. (e)Reconciliation of total turnover was not made by the A.O, though such verification was one of the criteria for selection of this case.
A show cause notice was issued to the assessee on 07-07- 2017 requiring it to submit clarification or explanation to the aforementioned issues & also to show cause why remedial action u/s 263 of the Act would not be taken against the assessment made u/s 143(3) of the Act dated 23- 12-2016. Further, a notice u/s 263 of the Act was issued on 18-07- 3
Assessment Year : 2014-2015 Graphite India Limited 2017. In its response, Ms Ruchira Lakhotia, ACA & A/R, appeared and furnished written submission.
5. The ld. Pr. Commissioner of Income Tax thereafter reproduced the written submission filed by the assesese and recorded the following finding:- “4. I have carefully considered the submission made on behalf of the assessee and perused the material available on record. After having considered the position of law and facts and circumstances of the instant case, I am of the considered opinion that the assessment order passed by the A.O. is erroneous in so far as it is prejudicial to the interest of revenue in accordance with the Explanation 2(c) below section 263(1) of the Act. As a result, the assessment order passed by the A.O. is set aside in respect of the point stated in Para- 2(a), 2(b), 2(c) & 2(e) above. 4.1. In respect of point stated in Para 2 (a), the contention of the A/R of the assessee is not correct and also the A.O. didn't make disallowance as per the instruction of the CBDT. As per the Assessee's Balance sheet as on 31/03/2014 that the assessee had made investment and dividend from which is not to be included in total income. But, the assessee has failed to disallow proportionate expenditure incurred for earning exempt income as laid down u/s.14A of the Act. Hence, satisfaction cannot be drawn that no expenditure was incurred in relation to such investment. Investment is an important part of the business which requires involvement of top management and analysis of several data, information etc. Therefore, some expense is bound to be incurred. As per validity of the Circular No. 5 of 2014 [F.NO.225/1 82/2013- ITA.II. Dated 11/02/2014], in which the Central Board of Direct Taxes has clarified that even if the assessee has not earned any exempt income, disallowance u/s 14A would be made. Thus in the light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income." The A.O. is required to look into the matter and to quantify the disallowance as per the sec. 14A keeping the view of the instruction as well as the amendments and its applicability.
Assessment Year : 2014-2015 Graphite India Limited 4.2. In respect of point stated in Para 2 (b), the contention of the A/R of the assessee is not correct. As per the submission of the assessee, it is stated by the A/R of the assessee that the case shall be referred to transfer pricing adjustment of Rs. 10 Crore or more in earlier A.Y. However, in the case of the assessee, transfer pricing adjustment of Rs. 1.16 Crore was made in A.Y. 2013-14. Since the adjustment is less than Rs. 10 Crore, the case was not referred to transfer pricing officer by the A.O. In this regard, attention is drawn to the Para 3.2 of the instruction No 3/2016 [F.No. 500/9/201 5-APA-ll] and also the selection parameter of the Scrutiny being the complete scrutiny, the case was to be referred to the Transfer Pricing Officer. Moreover the Id AR has put up clarificatory details as well as reasoning for apparent discrepancy in disclosure. However what needs to be considered is that neither the said clarification was sought by the AO nor any enquiry was made by the AO to check the correctness of specific domestic transactions. The issue of reference to TPO could be decided only after ascertaining the quantum of specific domestic transactions which the AO has failed to do at the time of assessment proceedings. Further the A.O didn't compute the actual computation under sub section 3 of the sec. 92C of the Act and this resulted in the understatement of income and hence, the order made in this regard is considered as erroneous and prejudicial to the interest of revenue. 4.3. In respect of point stated in Para 2 (c), the A.O. failed to make enquiry and verification of the Capital work in progress and didn't asked for proper documents and its analysis due to which the assessment order suffered from lack of enquiry. The contention of the A/R of the assessee may also be considered incorrect as the same was merely explained without any proper documentation. Thus in absence of proper enquiry and proper documentation, the explanation doeSn't have any meaning. The same should have been judicially examined only after bringing on record full facts which the A.O has failed to do at the time of assessment proceedings and hence, the order made in this regard is considered as erroneous and prejudicial to the interest of revenue. 4.4. In respect of point stated in Para 2 (e), the A.O. didn't ask for the reconciliation of the figures in respect of the total turnover reported in the Audit report and ITR. The A/R filed the reconciliation figures in the submission. The same is required to be examined and verified by the A.O. As the reconciliation figures were not filed by the A/R of the 5
Assessment Year : 2014-2015 Graphite India Limited assessee company and the ITR & Form 3CD was filed only by the assessee which is evident from the submission. Since, the A.O. failed to collect the reconciliation statement with proper explanation, hence, the order made in this regard is considered as erroneous and prejudicial to the interest of revenue. The A.O. is also directed to provide reasonable opportunity to the assessee company to produce documents & evidences which it may choose to rely upon for substantiating its own claim. Thereafter a fresh assessment order may be passed in accordance with the relevant provisions of law.
6. The ld. Counsel for the assessee at the very outset submitted that for initiating the action under section 263 of the Income Tax Act, ld. Pr. Commissioner originally harboured five reasons, namely (a) to (e) [extracted supra]. He further submitted that as far as Item (d) is concerned, ld. Pr. Commissioner did not give any direction and it relegated the issues from Item (a), (b), (c) and (e) to the ld. Assessing Officer. He took us through paragraph no. 4.1 to 4.4 in this regard (extracted supra). The ld. Counsel for the assessee further submitted that in pursuance to this order, fresh assessment order has been passed by the ld. Assessing Officer and substantially the assessee is not much aggrieved with regard to the finding of the ld. Assessing Officer on the issues incorporated in (b), (c) and (e) of the above reasons. The only concern of the assessee is with regard to Item No. (a), where disallowance under section 14A was to be worked out. He submitted that the assessee has no tax-free income in this year. In other words, ld. Counsel for the assessee submitted that no exempt
Assessment Year : 2014-2015 Graphite India Limited income has been claimed by the assessee, therefore, expenditure attributable to earning of any exempt income not required to be disallowed under section 14A. In other words, since there is no exempt income, there should not be any disallowance under section 14A. The approach of the ld. Pr. Commissioner is erroneous while relegating this issue for re-adjudication at the level of ld. Assessing Officer, hence it is not sustainable.
7. On the other hand, ld. D.R. relied upon the order of the ld. Pr. Commissioner and submitted that by the Finance Act, 2022, Section 14A has been amended and after incorporation of this amendment. The expenditure for future anticipated income, which would be tax-free, could be calculated and disallowed.
On the other hand, ld. Counsel for the assessee relied upon the judgment of the Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax (Central)-2 –vs.- M/s. Era Infrastructure (India) Limited rendered in dated 20th July, 2022. According to the ld. Counsel for the assessee, the Hon’ble Delhi High Court has considered the Finance Act, 2022 and thereafter held that if no tax-free income is available in the hands of assessee, then anticipated future income, the expenditure are not to be worked out for disallowance.
Assessment Year : 2014-2015 Graphite India Limited
9. We have duly considered the rival contentions and gone through the record carefully. Before we embark upon an enquiry on the facts and issues agitated before us to find out whether the action u/s 263 of the Act, deserves to be taken against the assessee or not, it is pertinent to take note of this section. It reads as under:- “263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
[Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-
(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include-
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income Tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
Assessment Year : 2014-2015 Graphite India Limited (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120;
(b) “record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.
Assessment Year : 2014-2015 Graphite India Limited Explanation.- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”
10. A bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show-cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on Assessment Year : 2014-2015 Graphite India Limited a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon’ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263.
(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.
Assessment Year : 2014-2015 Graphite India Limited (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted.
(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.
(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.
(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law.
(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted
Assessment Year : 2014-2015 Graphite India Limited to substitute his estimate of income in place of the income estimated by the AO.
(vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion.
(viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction.
(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.
11. Though the subsequent assessment order is not to be relied upon or appreciated for the purpose of judging the sustainability of 263 order in an appellate
Assessment Year : 2014-2015 Graphite India Limited jurisdiction, but we are taking cognizance of the subsequent assessment order and the submissions of the ld. Counsel for the assessee for a limited purpose. It is to be appreciated that if an assessment order passed subsequent to 263 order and it is not going to materially affect the assessee on certain issues, then, for the purpose of avoiding multiplicity of litigation, it is not advisable at our end to keep on adjudicating those issues, which assessee does not want to pursue any more. Therefore, we are not adjudicating the finding of the ld. Pr. Commissioner qua the Issue No. (b), (c) & (e) of the show-cause notice (extracted supra). The order of the ld. Commissioner is upheld qua these points.
12. As far as the finding of the ld. Pr. Commissioner qua Item No. (a) is concerned, we would take note the finding of the ld. Pr. Commissioner again at the cost of repetition, which reads as under:- 4.1. In respect of point stated in Para 2 (a), the contention of the A/R of the assessee is not correct and also the A.O. didn't make disallowance as per the instruction of the CBDT. As per the Assessee's Balance sheet as on 31/03/2014 that the assessee had made investment and dividend from which is not to be included in total income. But, the assessee has failed to disallow proportionate expenditure incurred for earning exempt income as laid down u/s.14A of the Act. Hence, satisfaction cannot be drawn that no expenditure was incurred in relation to such investment. Investment is an important part of the business which requires involvement of top management and analysis of several data, information etc. Therefore, some expense is bound to be incurred. As per validity of the Circular No. 5 of 2014 [F.NO.225/1 82/2013- ITA.II. Dated 11/02/2014], in which the Central Board of Direct Taxes has clarified that even if the assessee has not Assessment Year : 2014-2015 Graphite India Limited earned any exempt income, disallowance u/s 14A would be made. Thus in the light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income." The A.O. is required to look into the matter and to quantify the disallowance as per the sec. 14A keeping the view of the instruction as well as the amendments and its applicability.
13. The ld. Pr. Commissioner while finding error in the order of the ld. Assessing Officer, which has caused a prejudice to the interest of revenue, had harboured the belief on the ground that CBDT has issued a Circular, which provides that even if the assessee has not earned any exempt income, disallowance under section 14A would be made. This Circular is date back 2014. The view harboured in the Circular was once harboured by the ITAT, Special Bench, where one of us (Vice-President) was a party. This order of the Tribunal is reported in 317 ITR page 86 in the case of Cheminvest Care. This view of the ITAT, Special Bench has enabled the Department to issue this Circular. ITAT has delivered its judgment in 2009. This judgment of the ITAT was reversed by the Hon’ble Delhi High Court and the judgment of the Hon’ble Delhi High Court is reported in 378 ITR page 33. Recently Hon’ble Delhi High Court has considered this aspect again and also taken note of Finance Act, 2022, whereby Section 14A has been amended. This finding of the Hon’ble Delhi High Court in the case of Era Infrastructure (India) Limited reads as under:- 15 Assessment Year : 2014-2015 Graphite India Limited “3. He submits that the ITAT erred in relying on the decision of this Court in PCIT vs. IL & FS Energy Development Company Ltd., 2017 SCC Online Del 9893 (wherein it has been held that no disallowance under Section 14A of the Act can be made if the assessee had not earned any exempt income), as the revenue has not been accepted the said decision and has preferred an SLP against the said decision.
Learned counsel for the petitioner also submits that in view of the amendment made by the Finance Act, 2022 to Section 14A of the Act by inserting a non obstante clause and an explanation after the proviso, a change in law has been brought about and consequently, the judgments relied upon by the authorities below including PCIT vs. IL & FS Energy Development Company Ltd (supra) are no longer good law. The amendment to Section 14A of the Act is reproduced herein below:- “Amendment of section 14A. In section 14A of the Income-tax Act, - (a) in sub-section (1), for the words “For the purposes of”, the words “Notwithstanding anything to the contrary contained in this Act, for the purposes of” shall be substituted; (b) after the proviso, the following Explanation shall be inserted, namely:- “[Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income 5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to Section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: “4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary 16 Assessment Year : 2014-2015 Graphite India Limited contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.
This amendment will take effect from 1st April, 2022.
It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.
This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.” (emphasis supplied) 6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 has held that a retrospective provision in a tax act which is “for the 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 relevant extract of the said judgment is reproduced herein below: “9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us.
10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau)] . It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318) “[It is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has (sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the 17 Assessment Year : 2014-2015 Graphite India Limited cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand.”
The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years.
In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1- 4-2000, the substituted Explanation would read: “Explanation.—For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for— (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India.” The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change.
The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1- 4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on for any purpose for an anterior period.
In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the 18
Assessment Year : 2014-2015 Graphite India Limited appeal holding that it was a question of fact. (CIT v. S.R. Patton [(1998) 8 SCC 608] .) 15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4- 2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) : (1995) 215 ITR 165] . It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3. “5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India.
5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years.”
The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under Section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it.
As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67] .) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24] . If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the 19 Assessment Year : 2014-2015 Graphite India Limited main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506] . But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.” (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M Aqua Technologies Ltd. V. Commissioner of Income Tax, Delhi-III, 2021 SCC OnLine SC 575. The relevant portion of the said judgment is reproduced hereinbelow:- “22. Second, a retrospective provision in a tax act which is “for the 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. This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 as follows: 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.
There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word “earned” had been 20 Assessment Year : 2014-2015 Graphite India Limited judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income “arising or accruing in India”. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, “income payable for service rendered in India”.
When the Explanation seeks to give an artificial meaning to “earned in India” and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.” (emphasis supplied) 8. Consequently, this Court is of the view that 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.
Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in PCIT vs. IL & FS Energy Development Company Ltd (supra) and Cheminvest Limited vs. Commissioner of Income Tax-VI, (2015) 378 ITR 33.
Accordingly, the appeal and application are dismissed. However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of PCIT vs. IL & FS Energy Development Company Ltd (supra). MANMOHAN, J MANMEET PRITAM SINGH ARORA, J JULY 20, 2022”.
Assessment Year : 2014-2015 Graphite India Limited 14. In view of the above, the opinion of the ld. Pr. Commissioner on Point No. (a) is not sustainable. He has erred in following the Departmental Circular by ignoring unanimous decision of the Hon’ble High Courts and, therefore, his finding is not sustainable. We vacate the directions of the ld. Pr. Commissioner incorporated in paragraph no. 4.1 of the impugned order. In this way, the appeal of the assessee is partly allowed and the order passed under section 263 is partly modified. The issue relegated to the ld. Assessing Officer for re-examination of possibility of disallowance under section 14A is concerned, it is vacated. In other words, this finding is quashed.
In the result, the appeal of the assessee is treated as partly allowed. Order pronounced in the open Court on July 3rd, 2023.