THE DCIT, CIRCLE-1(1)(2), AHMEDABAD vs. M/S. CLP INDIA PVT. LTD.,, AHMEDABAD

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH Before: Shri Waseem Ahmed, Accountant Member And Shri T.R. Senthil Kumar, Judicial Member

ITA No. 290/Ahd/2020 Assessment Year 2015-16

The DCIT, M/s. CLP India Pvt. Circle-1(1)(2), Ltd. Ahmedabad Vs Room No. 207, 2nd Floor, Aaykar (Appellant) Bhavan, Vejalpur, Anandnagar Road, Vejalpur, Ahmedabad PAN: AABCT9663N (Respondent) Appellant by : Shri Biren Shah, A.R. Respondent by : Shri James Kurian, CIT-DR Date of hearing : 08-08-2022 Date of pronouncement : 04-11-2022 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:-

This appeal is filed by the Revenue against order dated 13.02.2020 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad, as against the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2015-16.

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2.1. The brief facts of the case is that the assessee is a company engaged in the business of generation and sale of electricity. For the Assessment Year 2015-16, the assessee filed its Return of Income declaring income of Rs. 3,27,23,22,660/-. The return was selected for scrutiny assessment. On verification of the books of accounts, profit and loss account by the Assessing Officer, it is noticed that the assessee has made investment in shares and claimed expenditure on account of interest payment on loans. The assessee was requested to explain whether provisions of section 14A read with Rule 8D is applicable in its case.

2.2. The assessee replied that the investments made by it, were strategic in nature and were for the purposes of its business, made in its subsidiaries, concerned with the Power Sector in which the assessee Company itself is engaged. Thus the intention of the assessee Company was not to earn exempt income. As it can be

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clearly seen from the Balance Sheet that the assessee Company’s own funds were invested, i.e. Share Capital and Reserves and Surplus, are significantly high, as compared to the Long Term Borrowings. The assessee Company has made investments of around Rs. 0.10 Crores, and on the other hand, the long term borrowings have decreased by Rs. 17.38 Crores. Hence, it is clearly established that the assessee Company has not used the external borrowings for the purpose of making investments, instead, the assessee Company has utilized its internal interest free funds for making investments during the assessment year 2015-16. Therefore the assessee was not liable to make any disallowance u/s. 14A read with Rule 8D. The assessee further submitted various case laws namely CIT vs. Torrent Power Ltd. (363 ITR 474) (Guj.); CIT vs. UTI Bank Ltd. (215 Taxmann.com 8) (Guj.) and CIT vs. Hitachi Home & Life Solutions (I) Ltd. (221 Taxmann.com 109) (Guj.). The assessee further submitted it has not earned any dividend income during the financial year and no disallowance should be made.

2.3. The assessee’s explanation was not accepted by the Assessing Officer. As per provisions of section 14A (3) of the Act, the A.O. shall proceed with determination of the amount of expenditure in relation to a case where as 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. Further as CBDT Circular No. 5/2014 dated 11/02/2014 which clarified that Rule 8D read with section 14A of the Act is applicable where the assessee has not

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earned any exempt income. Thus the assessing officer disallowed u/s. 14A of Rs. 21,07,73,322/- comprising of interest disallowance of Rs. 46,12,522/- and administrative expenditure of Rs. 20,61,60,800/- and demanded tax thereon. Similar adjustment is also made while computing book profit u/s. 115JB of the Act.

5.5 On perusal of relevant facts on record, it is found that Appellant has not earned any exempt in year under consideration and various Courts including jurisdictional High Court and Hon'ble Supreme Court has taken a consistent stand that once no exempt income is earned by Appellant, disallowance under Section 14A cannot be made. Reliance is placed on following decisions: (i) Hon'ble Gujarat High Court in case of CIT v. Corrtech Energy Pvt. Ltd. [45 Taxmann.com 116] [Vide Para 3] .....The Id. AR submitted that this finding of Id. CIT(A) is containing to the law settled by various judicial pronouncements. We have given our thoughtful consideration to the facts and the

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decision relied upon by the Id. AR. The Hon'ble Punjab & Haryana High Court in the case of CIT v. Winsome Textile Industries Ltd. [2009j 319 ITR 204 has held that in the present case, admittedly, the appellant did not make any claim for exemption. In such a situation, section 14A could have no application In this case also, the appellant has no: claimed any exempt income in this year. Therefore, respectfully following the judgment of Hon'ble High Court of Punjab & Haryana in the case of Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition. Therefore, ground No.1 to1.2 raised by the appellant in its cross-objection is allowed." (ii) Hon'ble Delhi High Court in case of Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Taxman 761: "Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Applicability) - Assessment year 2004-05 - Whether section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year - Held, yes [Para 23] [In favour of assessee]" (iii) Hon'ble Madras High Court in case of Commissioner of Income Tax, vs. Chettinad Logistics (P.) Ltd [2017] 80 taxmann.com 221 (Madras) dated 13/03/2017 Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (General principle) - Assessment year 2011-12 - Whether section 14A can only be triggered, if, assessee seeks to square off expenditure against income which does not form part of total income under Act; rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which does not form part of total income of assessee and it cannot go beyond what is provided in section 14A - Held yes - Whether where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 14A could not be invoked - Held yes [Para 8] [Matter remanded] The SLP fried by Revenue against the said decision is dismissed by Supreme Court on 02/07/2018 [2018] 95 taxmann.com 250 (SC). (iv) Hon'ble Supreme Court of Indie in case of PCIT Vs Oil Industry Development Board [2019] 103 taxmann.com 326 Section 14Aofthe Income-tax Act, 1961 -

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Expenditure incurred in relation to income not includible in total income (Applicability of) - In course of appellate proceedings, Tribunal held that in absence of any exempt income, disallowance under section 14-A of any amount was not permissible - High Court upheld order passed by Tribunal -Whether, on facts, SLP filed against decision of High Court was to be dismissed - Held, yes [Para 3] [In favour of assessee] Considering the above judicial pronouncements and the facts of the case on hand, it is held that, in the year under consideration as the appellant has not earned any exempt income, disallowance under Section 14A made by AO for Rs.21,07,73,322/- is not justified. Therefore, the disallowance for Rs.21,07,73,322/- u/s 14A of the act in the case of appellant is deleted in normal provision of the act as well as in the book profit u/s. 115JB of the Act. The grounds no. 2 & 3 of appeal are allowed.

4.1. The Ld. CIT-DR Shri James Kurian appearing for the Revenue submitted that the Ld. CIT(A) erred in deleting the disallowance u/s. 14A made by the Assessing Officer and further submitted taking note of the Amendment made in section 14A by the Finance Act 2022, which is retrospective in operation and Ld. CIT(A) ought not have deleted the addition made u/s. 14A of the Act and requested to restore the assessment order passed by the Assessing Officer.

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Pvt. Ltd. [45 Taxmann.com 116] held that when the assessee has not claimed any exempt income in this year, no question of disallowance u/s. 14A to be made, following the judgment of the Hon’ble High Court of Punjab & Haryana in the case of Winsome Textile Industries Ltd. [319 ITR 204].

6.1. Similarly Delhi High Court in the case of Cheminvest Ltd. vs. CIT [234 Taxmann.com 761] held that Section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply, where no exempt income is received or receivable during the relevant previous year. It is seen from the appellate order that the Ld. CIT(A) has followed the above Rulings of the various High Courts and also followed Hon’ble Madras High Court Judgment in the case of CIT vs. Chettinad Logistics (P.) Ltd. [2017] 80 Taxmann.com 221 wherein SLP filed by the Revenue was also dismissed by the Hon’ble Supreme Court on 02/07/2018 which is reported in [2018] 95 Taxmann.com 250. The Ld. CIT(A) also followed dismissal of SLP on disallowance of Section 14A in the case of PCIT vs. Oil Industry Development Board [2019] 103 Taxmann.com 326. Respectfully following the above judicial pronouncements and facts of the assessee’s case, the Ld. CIT(A) deleted the disallowance of Rs. 21,07,73,322/- made u/s. 14A of the Act and also in the Book Profit u/s. 115JB of the Act. Therefore the same does not require any interference.

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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) 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)

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"[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(l)(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(l)(ii) without any change. 13. 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(l)(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(l)(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. 14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the

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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]). 15. Given this legislative history of Section 9(l)(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. Pate/ 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." 16. 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. 17. 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 a/so 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,

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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-Ill, 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". 18. There was and is no ambiguity in the main provision of Section 9(l)(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 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". 19. When the Explanation seeks to give an artificial meaning to "earned in India" and brings about a change effectively in

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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." 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.

7.1. Respectfully following the above judicial principles the insertion of Explanation to Section 14A by the Finance Act, 2022 is operative only from the Assessment Year 2022-23 onwards and not applicable for the earlier Assessment Years and therefore the argument of the Ld. D.R. is hereby rejected.

7.2. The decision relied by Ld. A.R. in assessee’s own case in ITA No. 162/Ahd/2020 for the Assessment Year 2014-15 is clearly distinguishable, wherein dividend income has been earned by the assessee during the financial year and the disallowance is restricted to that amount. Therefore the decision is not applicable to the present case, since there is no dividend income earned during this financial year.

7.3. For the above reasons and following the judicial decisions, we have no hesitation in confirming the order passed by the Ld. CIT(A) and deleting the addition made u/s. 14A of the Act both on normal computation as well as in the book profits u/s. 115JB of the Act. Thus the Grounds raised by the Revenue has no merits and the same are dismissed.

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Order pronounced in the open court on 04-11-2022

Sd/- Sd/- (WASEEM AHMED) (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER True Copy JUDICIAL MEMBER Ahmedabad : Dated 04/11/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद