DCIT, CIRCLE- 21(1), NEW DELHI vs. RELIGARE ENTERPRISES LTD.,, NEW DELHI

Briefly, the facts are, the assessee is a resident corporate entity.

Before us, reiterating the stand taken before the first appellate authority, learned counsel for the assessee submitted that disallowance under Section 14A cannot exceed the quantum of exempt income earned during the year. For such proposition, he relied upon the decision of Hon'ble jurisdictional High Court in case of Joint Investment Pvt. Ltd. Vs. CIT 372 ITR 692 (Del.). Without prejudice, he submitted, the additional disallowance made by the assessing officer is unsustainable as assessee has utilized interest free fund available with it to make investment in non-convertible debentures.

Learned Departmental Representative, in addition to his oral submission has filed written submissions. In sum and substance, the learned Departmental Representative submitted that, in view of the amendment made to Section 14A of the Act by Finance Act, 2022, disallowance of expenditure has to be made irrespective of the fact whether or not exempt income is earned during the year. For the sake of completeness the submissions of learned Departmental Representative are reproduced hereunder:

Each of the aforesaid contentions are elaborated hereunder: Re (a): Amendment in section 14A - prospective and not retrospective 3. Kind attention is, at the outset, invited to the provisions of section 14A of the Act, as amended by the Finance Act, 2022, w.e.f. 01.04.2022: "14A. Expenditure incurred in relation to income not includible in total income. (1) Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which dos not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 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”. (Emphasis supplied) Note# Italicized portion inserted by Finance Act, 2022, w.e.f. 1.04.2022 4. On perusal of the aforesaid, it will kindly be appreciated that the following two amendments have been made in section 14A by the Finance Act, 2022, w.e.f. 01.04.2022: a. The words, “Notwithstanding anything to the contrary contained in this Act, for the purposes of, has been inserted in sub- section (1); and b. New Explanation has been inserted after proviso below sub- section (3).

Kind attention is invited to the following relevant provisions of the Finance Bill/ Act, 2022 and the Memorandum explaining the provisions in the Finance Bill, 20.22, which clearly demonstrate, without any doubt whatsoever, that the aforesaid amendments have specifically been made from 01.04.2022 and are applicable from assessment year 2022-23 and onwards: a. Section 2(a) of the Finance Act, 2022 clearly provides that sections 2 to 84 shall, save as-othefwise provided, come into force on the lstday of April, 2022. Therefore, all sections of the Finance Act, 2022, unless otherwise provided, are categorically brought into force on 01.04.2022 (refer Page 86 of CLPB II); b. Amendments in section 14A were made by clause 9, which is, in terms of above section 2(a), came into force on 01.04.2022 (refer Page 87 of CLPB II); c. In the Memorandum explaining the provisions in the Finance Bill, 2022, in respect of aforesaid clause 9, it is clearly stated that the amendments in section 14A will take effect from 01.04.2022 and will apply to assessment year 2022-23 and subsequent assessment years. The relevant para 7 of the Memorandum is reproduced hereunder (refer Page 101 of CLPB II): “7. 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. Clause 9.” (emphasis supplied) 6. From the aforesaid, it is patently clear that the amendments in section 14A are applicable in relation to the assessment year 2022-23 and subsequent assessment jjears and are not applicable for earlier assessment years, including assessment year 2014-15, the year under consideration in the present appeal.

The aforesaid contention is, it is submitted, further fortified by following amendments made by the Finance Act/ Bill, 2022, which have specifically been made applicable retrospectively from earlier assessment years as specified in the relevant sections: a. By virtue of clause 13, section 40 was amended to insert Explanation 3 specifically w.e.f. 01.04.2005. The relevant extracts of the Finance Bill are as follows (refer Page 88 of CLPB II):

The expression “does not form part of total income”, in our respectful submission, refers to actual/ real income for the relevant assessment year in which the applicability of the provisions of section 14A of the Act are being tested/ applied. The said expression, more particularly the expression “does not”, it is submitted, refers to the actual/ real income for the relevant assessment year and not to any futuristic/ unreal/ speculative amount which may or may not be received at any future date.

Kind attention in this regard is invited to the dictionary meaning of the expression ‘does’ as given in various dictionaries: As per Collins Cobuild Student’s Dictionary - ‘does’ is the third person singular of the present tense of do. - ‘Doesn’t’ is the usual spoken form of ‘does not ’ In Oxford Dictionary the word ‘does’ is defined as under: “do " Verb (does past did, past part done) 1 perform or carry out (an action). 2 achieve or complete (a specified target) 3 act or progress in a specified way 4 work on (something) to bring it to a required state 5 have a specified result or effect on the walk will do me good. 6 work at for a living or take as one’s subject of study what does she do. 7 make or provide 8 be suitable or acceptable he ’11 do 9 (be/have done with) give up concern for, have finished with informal regularly take (a narcotic drug). ‘does ’ Third person singular present of Do ’

On perusal of the aforesaid dictionary meaning of the word ‘does’, it will be kindly appreciated that the word ‘does’ refers to third person singular of the present tense of ‘do’, which means the act done in present. The word ‘does’, it is emphatically submitted, refers to an act of the present and not the future. In the context in which the word ‘does’ finds place in section 14A(1)of the Act, it is respectfully submitted that the same refers to the determination of the factum of receipt of exempt income in the relevant previous year.

In simple words, for section 14A of the Act there must be income actually earned in the first place and such income does not form part of ‘total income’, which is defined under section accrued (or deemed to be accrued) or arising, during the relevant previous year. As a necessary corollary, the aforesaid quoted expression refers to earning of exempt income during the relevant previous year. 24. It is emphatically submitted that construing the aforesaid expression “does not form part of total income”, the Courts have held that the said expression connotes/ refers to the real/ actual income for the relevant assessment year and therefore, only expenditure incurred in relation to actual exempt income for the relevant assessment year can be subject matter of disallowance under section 14A of the Act. As a necessary corollary, the Courts have held that the disallowance under section 14A must be computed only with reference to the dividend yielding investments and must, in any case, be restricted to the exempt income (refer judicial precedents referred on page 9-10 of chart of issues). 25. Specific reliance in this regard is placed on the following decisions: • The Delhi High Court in the case of CIT vs. Holcim India Pvt. Ltd.(2014) 272 CTR 282 (Del) held that the disallowance under section 14A of the Act cannot be made in the absence of any exempt income. In coming to the said conclusion, the Hon’ble Court observed as under [refer pages 56-62 of CLPB II]: “13. We are confused about the stand taken by the appellant-Revenue. Thus, we had asked senior standing counsel for the Revenue, to state in his own words, their stand before us. During the course of hearing, the submission raised was that the shares would have yielded dividend, which would be exempt income and therefore. the CIT (A) had invoked s. 14A to disallow the entire expenditure. The aforesaid submission does not find any specific and clear narration in the reasons or the grounds given by the CIT (A) to make the said addition. Possibly, the CIT (A), though it is not argued before us, had taken the stand that the respondent-assessee had made investment and expenditure was incurred to protect those investments and this expenditure cannot be allowed under s. 14A.

Income exempt under s. 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, max depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc., cannot be ruled out is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.

The words "in relation to income which does not form part of the total income under the Act for such previous year" in the above r. 8D(1) indicates a correlation between the exempt income earned in the assessment year and the expenditure incurred to earn it. In other words, the expenditure as claimed by the assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the assessment year in question. the question of disallowance of the expenditure incurred to earn exempt income in terms of s. 14A r/w r. 8D would not arise. 18.The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to r. 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to r. 8D as well as the title to s. 14A. The circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered. 19.In the considered view of the Court, this will be a truncated reading of s. 14A and r. 8D particularly when r. 8D (1) uses the expression 'such previous year’. Further, it does not account for the concept of 'real income'. It does not note that under s. 5 of the Act. the question of taxation of 'notional income' does not arise. As explained in CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010)233 CTR (SC) 42: (2010) 41 DTR (SC) 233 : (2010)326 ITR 1 (SC), the mandate of s. 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives byway of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT Dt. 11th Feb., 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration.

The fundamental principles governing the applicability of section 14A of the Act may, thus, be culled out from the aforesaid decisions as under: a. The expression “income” in section 14A refers to “real income” earned during the relevant assessment year and mot to any notional/ speculative/ futuristic amount; b. The expression “does not form part of total income” refers to real income for the relevant assessment year - since the expenditure has to be disallowed in relation to “such income”, which means the real income for the relevant assessment year, the disallowance cannot exceed the exempt income; c. Rule 8D of the rules clearly and categorically requires disallowance to be computed of the expenditure incurred in relation to income which does not form part of total income “for such previous years” and therefore, the correlation has to be between the actual exempt income for the year and the expenditure incurred in relation to such actual exempt income.

It is utmost important to note that the substantive expression “expenditure incurred in relation to income which does not form part of total income”, has not undergone any change/ amendment. 28. What is therefore sought to be emphasised is that the afore-quoted expression, which has been construed by the Courts to mean that the expenditure incurred in relation to actual/ real income is to be disallowed, has not been amended and therefore, even after the amendment, there is no change in the legal position as existed prior to the amendment by the Finance Act, 2022. 29. It is quite elementary and well-settled that the Legislature is presumed to be aware of the judicial interpretation of any particular provision/ statute and therefore, if the Legislature, in its wisdom, still decides not to make any amendment, the presumption is that the judicial interpretation stands accepted by the Legislature [refer Municipal Corporation of Delhi vs. Shiv Shanker: (1971) 1 SCC 442 (SC); Greater Bombay Coop. Bank Ltd vs. United Yarn Tex (P) Ltd: (2007) 6 SCC 236 (SC); Shree Bhagwati Steel Rolling Mills vs. CCE: (2016) 3 SCC 643 (SC); Bangalore Club vs. CWT: (2020) 9 SCC 599 (SC); Mohd. Arshad vs. M/s. Naimuddin Nasimuddin and Anr: (1989) SCC OnLine Pat 283 (Pat.); Most. Najum Bibi vs. Jamila Khatoon: (1990) 187 ITR 548 (Pat.)].

For the sake of emphasis, it is respectfully submitted that in the absence of any substantive amendment in section 14A(1) of the Act, more particularly the expression “income which does not form part of total income” which has been interpreted by the Courts to mean that the disallowance must be restricted to actual/ real income earned during the relevant year, the corollary is that judicial interpretation stands accepted and there is, even otherwise, no legislative intent to dilute the principle so laid down in various judicial precedents.

Even otherwise, it is further respectfully submitted that on deeper analysis of the relevant provisions of the newly inserted Explanation, it will kindly be appreciated that following are the pre-requisites for its application: a. Explanation applies only “in a case where the income, not forming part of the total income” under the Act has not accrued or arisen or has not been received during the relevant year. Therefore, there must first be “income”, which has not been included in the total income either on account of it not having accrued/ arise and/ or not having been received. But what is important is there must be income, in the first place. In the absence of any real income, the Explanation, in our respectful submission cannot be applied. b. The Explanation applies once there is definite income, which may not be includable in total income of the relevant year, may be on account of it not having accrued or arisen or not having been received.

The aforesaid may be explained with the help of the following examples: a. In case of tax-free interest-bearing bonds, interest income may accrue or/ arise and may be received at a future date, may be at the time of its redemption. In above example, provisions of section 14A would apply to such bonds, because there is definiteness of income (i.e., income by applying the rate of interest is known). The said definite income is not included in the total income of the relevant year only on account of the fact that the same will accrue/ arise and shall be received at a later date. b. Another example could be exempt income (like fixed rate of return) receivable on any security like bank FD in NRE account) - In that case also, the quantum of interest income is definite/ known, which may accrue/arise and/ or may be received at a future date. In the aforesaid examples, merely because (interest) income, though known, is not included in the income of the relevant year, one may not be able to contend that section 14A is not applicable. Now, in view of the newly inserted Explanation, section 14A of the Act shall still be applicable, even though such known income is not relatable to the relevant assessment year.

In case of shares, it will, however, kindly be appreciated that there is complete uncertainty as to whether or not any amount/ income (be it dividend or capital gains) arise at all at a later date or not, and if at all the same shall arise, whether or not the same shall be exempt from tax or not. As has judicially been recognized by the Delhi High Court in the case of Holcim (supra), a shareholder has no control over any amount being received as dividend and cannot, in fact, insist on payment of any dividend.

Therefore, merely by holding shares, it cannot be inferred that there is any amount not taxable in future - there is, in fact, complete uncertainty, much less definiteness, to the amount of income/ dividend, if at all, receivable at any time in future.

Just to elaborate, the receipt of dividend and it being exempt in future is subject to multiple improbable(s), some of which (only indicative/ illustrative list and not exhaustive) are highlighted as under: a. Profit making company may or may not decide to distribute its profit by way of dividend and may, in fact, at a later stage suffer huge losses which may completely wipe-out the profits and may therefore, render the company totally incapable of distributing any amount as dividend; b. Loss-making company, which has no capability (both legally as well as practically) to distribute any amount of dividend, and therefore, it would be totally absurd to consider investment in that company for the purpose of disallowance under section 14A;

Having regard to the aforesaid, it is respectfully submitted that looked at from whatever angle, the legal position even after the amendment is that the provisions of section 14A of the Act cannot be applied in a situation where there is no definite income in the relevant year.

For the aforesaid cumulative reasons, it is respectfully submitted that even after the amendment and insertion of Explanation in section 14A of the Act, the fundamental principle, more particularly in case of shares, that disallowance cannot exceed the exempt income, has not been diluted and/or undergone any change and continues to hold the field.

Being so it is respectfully submitted that the disallowance under section 14 A of the Act, even post-amendment cannot exceed the exempt dividend income actually earned in the relevant year. Summary/ Conclusion 40. In view of the aforesaid legal position, it is respectfully submitted that the amendments made to section 14A vide Finance Act, 2022 are prospective in nature i.e., are applicable from assessment year 2022-23 onwards and are not applicable to the present assessment year 2014-15.

Alternatively and strictly without prejudice to the aforesaid, the legal position that disallowance under Section 14A cannot exceed the quantum of dividend (exempt) income earned during the year under consideration, in our respectful submission, still holds the field despite insertion of Explanation below proviso to sub-section (3) of section 14Aof the Act. Therefore, for this reason, too the disallowance under Section 14A of the Act must be directed to be restricted to exempt income.”

In reply, learned counsel appearing for the assessee submitted, the amendment to section 14A of the Act by Finance Act, 2022 would not have retrospective operation and will apply prospectively from assessment year 2022-23. In support of such contention, he relied upon the following decision:

We have considered rival submissions in the light of decision relied upon and perused material on record. In so far as the factual aspect of the issue is concerned, there is no dispute that the assessee, in the year under consideration, has earned exempt income by way of dividend amounting to Rs.45,06,37,566.

Undisputedly, assessee has disallowed suo motu an amount of Rs.193,75,05,498 under Section 14A of the Act, being expenditure attributable to the earning of the exempt income. Of course, the assessing officer made further disallowance of Rs.28,63,13,621.

The primary and main contention of assessee before us is, disallowance of expenditure under Section 14A cannot exceed the exempt income earned during the year. The assessee has submitted, even if, assessee mistakenly might have disallowed expenditure more than the quantum of the exempt income earned during the year, however, such mistake committed cannot be held against the assessee ignoring legal principles laid down on the issue. We must observe, in case of Joint Investment (Pvt.) Ltd. vs. CIT (supra), Hon'ble jurisdictional High Court has categorically held that disallowance of expenditure under Section 14A of the Act cannot exceed the quantum of exempt income earned during the year. In fact, learned Commissioner (Appeals), in principle, has accepted aforesaid legal proposition. However, only because the assessee itself has disallowed certain amount exceeding exempt income, learned Commissioner (Appeals) has restricted the disallowance to that amount. This, in our view, is improper. If due to ignorance of legal position or by mistake certain disallowance, which is either not to be made or is more than the quantum of disallowance to be actually made, such mistake or ignorance committed by the assessee cannot be held against him and to his disadvantage. This is so, because, there is no estoppel against law. The same principle applies to the assessee, as well, in case of any wrong claim of deduction or exemption which is contrary to the statutory provision. Thus, keeping in view the ratio laid down by the Hon'ble jurisdictional High Court in case of Joint Investment (Pvt.)

Having held so, it is necessary to deal with the submissions of learned Departmental Representative regarding retrospective application of amendment made to section 14A by Finance Act, 2022 w.e.f. 01.04.2022. In case of PCIT vs. Era Infrastructure India Ltd. (supra), the Hon'ble jurisdictional High Court very clearly and categorically has held that such amendment will apply prospectively from assessment year 2022-23. Following the aforesaid decision of the Hon'ble jurisdiction High Court , the co-ordinate Bench in case of ACIT vs. Hindustan EPC Ltd. (supra) has expressed identical view.

In the result, revenue’s appeal is dismissed and cross-objection filed by the assessee is allowed as indicated above.