INDUS VALLEY PROPERTIES PRIVATE LIMITED,KABRA EXCELCIOR vs. INCOME TAX OFFICER WARD 3(1)(4) BANGALORE, BANGALORE,

5. The assessee submitted that provisions of section 14A of the Act does not apply to the assessee as it has no exempt income earned during the year and therefore no disallowance can be made.

6. The ld. AO despite the above fact computed the disallowance taking 1% of annual average of investment and worked out the disallowance of Rs. 23,61,111 u/s. 14A of the Act r.w. Rule 8D. Assessment order u/s. 143(3) of the Act was passed on 31.10.2019.

7. The assessee preferred appeal before the ld. CIT(Appeals) wherein amongst other submissions, assessee submitted that it has earned no exempt income and therefore provisions of section 14A of the Act does not apply. The ld. CIT(A) ignored the above submission and after recomputation, confirmed the disallowance of Rs.17,70,833. The assessee is in appeal before us on the same issue.

• Cheminvest Ltd. v. CIT I[2015] 378 ITR 33 (Del) • PCIT v. Alchemist Ltd., 167 taxmann.com 284 • PCIT v. Era Infrastructure Ltd., 448 ITR 674 (Del) • PCIT v. Sahara India Finance Corporation Ltd., 168 taxmann.com 165 11. Further the Hon’ble Karnataka High Court in the case of Biocon Ltd. v. DCIT in 125 taxmann.com 164 has also categorically held that where there was no exempt income accrued to the assessee during the year, no disallowance can be made u/s. 14A of the Act.

"13. Heard the learned counsel appearing for the parties and also perused the material placed on record.

The Explanation to Section 14A of the Income Tax Act, 1961 is inserted vide Finance Bill, 2022. The Ministry of Finance, Union of India, issued Memorandum Explaining the Provisions in the Finance Bill, 2022.

The relevant extract of the said Memorandum reads as under:

"Clarification in respect of disallowance under Section 14A in absence of any exempt income during an assessment year.

Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income as per the provisions of the Act (exempt income).

2. Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year.

3. The CBDT issued Circular No.5 of 2014, dated 11/02/2014, clarifying that rule 8D read with Section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the Legislature. To illustrate, if during a previous year, an assessee incurs an expense of Rs. 1 lakh to earn non- exempt income of Rs. 1.5 lakh and also incurs an expense of Rs. 20,000 to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued/received during the year, it amounts to holding that Rs.20,000 would be allowed as deduction against non-exempt income of Rs.1.5 lakh even though this expense was not incurred wholly and exclusively for the purpose of earning non-exempt income. Such an interpretation defeats the legislative intent of both Section 14A as well as Section 37of the Act.

5. This amendment will take effect from 1st April, 2022.

6. 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.

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."

14. Taking note of above, the Division Bench of Delhi High Court in "Era Infrastructure (India) Ltd., Judgment dated 20.07.2022" (supra), considering the question whether the Explanation inserted to Section 14A of Act of 1961 is retrospective or prospective in nature, has held as under:

"However a perusal of the Memorandum of the Finance Bill, 2022 ([2022]440 ITR (St.) 226) 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 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.

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."

(emphasis supplied )

Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 71 7 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 (page 316 of279 ITR)

"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.

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] 4 Taxman 79/124 ITR 391 (Gujarat)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [[2000] 241 ITR 314 (Gauhati) ] . 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 (page 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 had somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the 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 (SC)] . 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] [1991] 65 Taxman 472/193 ITR 49 (Kerala), while following the Gujarat High Court's decision in CIT v. S.G. Pgnatale [[1980] 4 Taxman 79/124 ITR 391 (Gujarat)] 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 appeal holding that it was a question of fact. (CIT v. S.R. Patton [(1998) 8 SCC 608]. 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. 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 20002001 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 (SC)] 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 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)

"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 (page 318 of 279 ITR):

'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 Ku. 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".

(emphasis supplied)

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."

15. In Era Infrastructure India Ltd., order dated 16.07.2024 (supra), the Delhi High Court, relying on the decision rendered in "Era Infrastructure (India) Ltd. , Judgment dated 20.07.2022" (supra), has dismissed the appeal preferred on behalf of the Revenue.

The operative portion of the decision rendered in M/s Jas Toll Road Company Ltd. (supra) is reproduced hereunder:

"Upon careful consideration and going through the materials on record we find that the learned tribunal was fully justified in dismissing the appeal filed by the revenue affirming the order passed by the Commissioner of Income Tax [Appeals], Kolkata- 20. The issue involved in the case is that whether disallowance under Section 14A of the Act can be made even if the assessee has not earned any exempt income, the issue is no longer res integra and there are several decisions to the effect that amendment made under Section 14A of the Act by Finance Act, 2022 will be applicable prospectively and disallowance should not exceed the exempt income earned by the assessee during the year.

The PCIT has also noted the decision of the Hon'ble Supreme Court in CIT v. Chettinad Logistics Pvt. Ltd [2018] 95 taxmann.com 250/257 Taxman 2 (SC) and PCIT-18 v. Oil Industrices Development Board, SLP (Civil) Diary No.2755/2019.

Thus, we find no ground to interfere with the order passed by the learned tribunal.

Accordingly, the appeal is dismissed and the substantial questions of law are answered against the revenue."

The operative portion of the decision in Avantha Realty Ltd. (supra) reads as under:

"Substantial questions Nos. D & E pertain to the deletion of the disallowance made under Section 14A of the Act. The learned Tribunal took note of the decision of the High Court of Delhi in Era Infrastructure (India) Ltd. (supra), which had taken note of the decision in the case of Cheminvest Ltd. (supra), wherein it was held that amendment by the Finance Act, 2022 of Section 14 A of the Act by inserting a non-obstante clause and explanation we take effect from 01.04.22 and cannot be presumed to have retrospective effect and, therefore, on facts the amendment cannot be applied to the assessment year under consideration. We find no error in such conclusion arrived at by the learned Tribunal.

Accordingly, substantial questions of law No.D & E are decided against the revenue."

18. Later on, the Delhi High Court, in Uniparts India Ltd. (supra), has made a specific statement that so far as the applicability of Explanation inserted to Section 14A by Finance Bill, 2022 is concerned, it is settled that the same will apply prospectively.

19. The High Court of Madhya Pradesh has also followed the same view in Principal Commissioner of Income-tax (Central) v. Keti Construction Ltd. [2024] 162 taxmann.com 278 (Madhya Pradesh) .