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Income Tax Appellate Tribunal, ‘A BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI JAGADISH
These appeals by the Revenue are arising out of the different orders of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi in orders No.ITBA/NFAC/S/250/2024-25/1068219337(1) and ITBA/NFAC/S/250/2024-25/1068219413(1) dated 31.08.2024 for assessment years 2011-12 and 2013-14. Since, the issues are common in both these appeals, we take up for assessment year 2011-12 for adjudication.
The registry has noted delay of 14 days in filing the appeals.
Considering the period of delay and reasons stated in condonation petition along with affidavit by the ACIT for the revenue, we condone the delay and admit the appeal for adjudication.
Grounds of appeal filed by the revenue are as under:
(1) The order of the Ld. CIT(A), NFAC, Delhi is opposed to law on the facts and in the circumstances of the case. (2) The Ld. CIT(A) erred in observing that the assessee had more non- interest bearing funds which exceeds the investment made by the assessee, without considering the fact that the assessee had not established the same before the Assessing Officer. (3) The Ld. CIT(A) erred in holding that disallowance under Rule 8D 2(iii) can be made only for those investments that have earned exempt income during the year. (4) The Ld. CIT(A) erred in not considering the explanation inserted to section 14A of the Act in the Finance Act, 2022 wherein it has been clarified that " 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 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 not forming part of total income" (5) The Ld. CIT(A) erred in holding that disallowance w/s 14A r.w.Rule 8D should not be made while computing Book Profit u/s 115JB. (6) The Ld.CIT(A) failed to consider that the decision of the Hon'ble ITAT, Mumbai Bench in the case of DCIT vs Viraj Properties Ltd reported in 156 ITD 72 wherein it has been held that the addition on account of disallowance u/s. 14A r.w.Rule 8D being expenditure in relation to earning of exempt income to Book Profit u/s I 15JB is justified. (7) For these and such other grounds that may be adduced at the time of hearing and it is prayed that the order of the Ld.CIT(A) may be reversed and that of the Assessing Officer be restored.”
4. The assessee filed its Return of Income for AY 2011-12 on 28-09- 2011 declaring a total income of Rs.54,10,48,485/- under normal provisions and deemed income of Rs.66,08,93,782/- u/s 115JB. The case was selected for complete scrutiny. The assessment in this case for AY 2011-12 was originally completed u/s.143(3) on 27-02- 2014 disallowing, amongst others, a sum of Rs 603,742/- u/s 14A calculated at the rate of 2% of the dividend amount received.
Thereafter, the Commissioner of Income Tax, exercising powers u/s 263, directed revision of assessment, amongst others, in respect of disallowance u/s 14A, On such directions, a fresh assessment u/s 143(3) r.w.s 263 was completed on 23-09-2015, re-computing the disallowance u/s 14A in a sum of Rs 1,01,30,836/ as under:
Against the aforesaid order, assessee preferred an appeal to the Honble ITAT and submitted that since the investments were made from the assessee‘s own non-interest bearing funds, the provisions of Section l4A will not be applicable. Therefore, it was pleaded that the matter may be remitted back to the file of the Learned AO for fresh consideration. The Hon’ble ITAT allowing the appeal of the assessee, acceded to the request of the assesse and remitted the matter of computation of disallowance is 14A to the Learned AO with the following specific directions:-
On several earlier occasions, we have held that if the assessee has made investment in shores of its sister companies for earning exempt income out of its own noninterest bearing funds then provisions of Section 144 will not be applicable because there would be no cost attributable for making investment in one’s own concern. Further we find that the MAO has not made a finding as to whether any cost is attributable for earning exempt income in the case of the assessee in order to invoke the provisions of Section 14A and Rule 8D of the Rules. Therefore in the interest of justice, we hereby remit back the matter to the file of Ld.AO for flesh consideration for both the assessment years. In the result, the Appeals of the asessee for both the assessments years are allowed for statistical purposes.
On such remand, the AO called for particulars regarding the position of assessee’s own non-interest bearing finds in each of the years in Which investments were made by the assessee. The assessee furnished year wise details of investments made commencing from FY 1973-74 (being the very first year in which investments were made) and details of own funds in the each of those years, which established the fact that your Appellant possessed substantial own finds (represented by share capital and reserves) far in excess of investments made. However, after duly considering the submissions made by the assessee and after noting that the company indeed has huge own finds far in excess of the investments, the AO enhanced the disallowance u/s 14A and re-computed the same as under:-
The main reasons adduced by the AO in making the enhancement are as under: a) That Assessee does not have separate bank account for purpose of investments and all the bank accounts are used for the purposes of the business as well as the investments. b) That Assessee did not maintain separate books of accounts for investments”
C) The incurrence of establishment expenses other administrative and general expenses etc. cannot be used in regard to maintaining of investments portfolio. d) That assessee had failed to prove that the Reserves and Surplus were liquefied and it was available in liquid form in the year of investment.
The following further facts relevant for the issue at hand and furnished to the AO during the course of the remand proceedings are given below: a) During the previous year relevant to AY 2011-12 your Appellant received dividend income of Rs 3,01,87,139/- as under: b) The year wise details of investments made and the own funds of the company are given below, indicating that in each of these years your Appellant had huge own funds much in excess of the investments made: c) The value of investments as at the beginning of the year and end of the relevant previous year are given below, indicating that no new investments were made in the relevant previous year. d) The following additional facts were also furnished to the 40 in the course of the remand proceedings to establish the fact that no expenditure was incurred for earning the exempted dividend income: - i. Dividends declared by the companies were automatically arid directly credited to Appellants bank accounts by NEFI/RTGS, expenses for which will be borne by the investee companies and not by the Assessee. ii. The investments were prominantly in group companies (99.89%) that have remained static and passive for several years, with no intention to sell any of these investments and consequently there was no monitoring activity in the investment portfolio necessitating any expenditure for the maintenance of the said portfolio. iii. All investments are held in demat format. Thus, the activity of safe keeping as well as maintaining records of shareholding have been outsourced by your Appellant to the depository participant (DP) by incurring demat charges of Rs.1,770/- which were already identified and duly disallowed by assessee u/s 14A in the return of income.
The learned AO gave credit for Its only to the tune of Rs.51,22,978/- instead of the correct amount of Rs.52,10,922/ thus reducing the credit already allowed in the giving effect order dated 20-09-2016.
The AO made a new addition of Rs 2,00,56,303/- (being the disallowance u/s 14A to the book profits computed u/s 115JB which was never made in any of the earlier assessment orders for the relevant year and which was neither disputed as pan of the grounds of appeal, nor the subject matter of any decision of appellate order of the Tribunal pursuant to which order now under appeal has been passed.
Aggrieved, assessee preferred an appeal before the ld. CIT(A).
The ld. CIT(A) vide his order dated 31.08.2024 has directed the AO to re-compute the disallowance under section 14A of the Act by excluding the investments that did not yield any exempt income during the relevant year. The ld.CIT(A) further held that the AO’s addition to the book profits under section 115JB is not in accordance with the law. Accordingly, he directed the deletion of the addition made to book profits. Aggrieved, the Revenue is in appeal before us.
Before us, the ld.DR Mr. R. Bhoopathi, Addl. CIT stressed upon the explanation inserted to section 14A by the Finance Act, 2022 and contended that it should be read retrospective.
Per contra, the ld. Counsel for the assessee submitted the position of own funds and investments as on 31.03.2011 which is illustrated hereunder:-
S.No Particulars Amount Amount I Value of investments as on Rs.18,836.36 31.03.2011 : Lakhs Amount of own funds as on 31.03.2011 Share Capital 866.63 Reserves & Surplus 36,504.91
Depreciation Reserve 22,779.11 Total own funds 60,150.65 60,150.65 lakhs The ld. Counsel for the assessee further submitted that in the case of sister concern titled ‘The Ramco Cements Limited Vs DCIT for AY 2013-14 dated 03.07.2024, the co- ordinate bench of the Tribunal has decided the very same issue in favour of the assessee’s sister concern hence equally apply in this case also. He has referred judgments of the Hon’ble Delhi High Court in the case of PCIT Vs Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi) and Hon’ble Calcutta High Court Judgment in the case of PCIT (Central) Vs Avantha Realty Ltd.
[2024] 164 taxmann.com 376 (Calcutta) for the proposition that the amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and explanation will take from 01.04.2022 are prospective and cannot be applicable retrospective. He also referred the special Bench order in the case of Vireet Investment [2017] 82 taxmann.com 415 (Delhi-Trib.)(SB).
We have heard both the parties, perused the materials available on record and gone through orders of the authorities below and case law citations.
9. In the case of sister concern titled ‘The Ramco Cements Limited for AY 2013-14 dated 03.07.2024, the co-ordinate bench of the Tribunal held as under:
6. Disallowance u/s 14A 6.1 The assessee earned exempt income of Rs.76.20 Lacs and offered suo-moto disallowance of Rs.1250/- in the computation of income. The assessee did not maintain any separate account for the same. Therefore, rejecting the submissions of the assessee and by applying Rule 8D, Ld. AO computed disallowance of Rs.91.54 Lacs which was interest disallowance u/r 8D(2)(ii) for Rs.58.35 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.33.19 Lacs. The Ld. CIT(A) not only upheld the stand of Ld. AO but also directed Ld. AO to enhance book profits u/s 115JB to that extent. Aggrieved, the assessee is in further appeal before us. 6.2 The Ld. AR, from financial statements, demonstrated that its own funds far exceed the investment made by the assessee. After going through the financial statements of the assessee as placed on record, this fact is clearly brought out at Page 365 of the paper book. In such a case, the disallowance of interest expenditure could not be sustained in law. We order so. 6.3 So far as disallowance of indirect expenditure is concerned, it is the plea of Ld. AR that only those investments are to be considered which have yielded exempt income during the year as held in various judicial decisions. We concur with the same and direct Ld. AO to re-compute the disallowance only by considering those investments which have yielded any exempt income during the year. This disallowance could not be made u/s 115JB as per the decision of Special bench of Tribunal in the case of Vireet Investments Pvt. Ltd. (165 ITD 27) which held that disallowance u/s 14A r.w.r. 8D has no application while computing the book profit u/s 115JB. Respectfully following the same, we direct Ld. AO not to make this adjustment u/s 115JB. The corresponding grounds raised by the assessee stand partly allowed.
10. The judgment of the Hon’ble Delhi High Court in the case of PCIT Vs Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi) held as under:
Manmohan, J. - Present Income-tax Appeal has been filed challenging the Order passed by the Income-tax Appellate Tribunal ('ITAT') in ACIT v. Era Infrastructure (India) Ltd. [ITA No. 798/Del/2018, dated 10th March, 2021] for the Assessment Year 2013-14.
2. Learned Counsel for the Appellant states that ITAT has erred in law in deleting the disallowance of Rs. 3,61,53,268/- made by the Assessing Officer under Rule 8D of Income-tax Rules, 1962 read with section 14A of the Income-tax Act, 1961 ('the Act').
3. He submits that the ITAT erred in relying on the decision of this Court in Pr. CIT v. IL&FS Energy Development Company Ltd. [2017] 84 taxmann.com 186/250 Taxman 174/399 ITR 483 (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 IL&FS Energy Development Co. Ltd. (supra) are no longer good law. The amendment to Section 14A of the Act is reproduced hereinbelow:— '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 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. 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." (emphasis supplied)
6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 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 hereinbelow: '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) "[I]t 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 cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand. " 11. 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. 12. 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 appeal holding that it was a question of fact. (CIT v. SR 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 UP., (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) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. 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 UP., (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 judicially defined in SG. 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.
9. 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 v. State of Kerala [2000] 113 Taxman 470/245 ITR 360 and Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association [1992] 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in IL & FS Energy Development Co. Ltd. (supra) and Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi).
10. 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 IL & FS Energy Development Co. Ltd. (supra).
8. The judgment of the Hon’ble Calcutta High Court Judgment in the case of PCIT (Central) Vs Avantha Realty Ltd. [2024] 164 taxmann.com 376 (Calcutta) held as under: 9. 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 14A 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.
The special Bench of the Tribunal in the case of Vireet Investment [2017] 82 taxmann.com 415 (Delhi-Trib.)(SB) held as under: 6.22 In view of above discussion, we answer the question referred to us in favour of asssessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2). is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income-tax Rules, 1962. …………………………….. ………………………………….. 11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.
Therefore, in the light of the above judgments of the Hon’ble Courts and Tribunal, we find no infirmity in the order of the ld. CIT(A) hence, the grounds of the revenue are dismissed.
Since the issues and grounds of appeal for AY 2011-12 are similar to AY 2013-14 hence, our order in AY 2011-12 is mutatis mutandis apply to the AY 2013-14 also.
13. In result, both appeals of the revenue are dismissed.