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Facts
For AY 2012-13, the assessee invested in unquoted shares and *suo moto* made a disallowance under Section 14A of the Act. The Assessing Officer (AO) enhanced this disallowance using Rule 8D of the Income Tax Rules, computing a higher amount of Rs.20,54,64,745/-. The Commissioner of Income Tax (Appeals) [CIT(A)] subsequently deleted the disallowance made by the AO.
Held
The Tribunal upheld the CIT(A)'s decision to delete the disallowance. It held that the AO failed to record his dissatisfaction with the assessee's *suo moto* disallowance as required by Section 14A(2) read with Rule 8D, which is a *sine qua non* for invoking Rule 8D. Furthermore, the Tribunal ruled that the explanation inserted by Finance Act, 2022 to Section 14A, clarifying its applicability even if no exempt income has accrued, is not retrospective, and thus not applicable to the assessment year 2012-13.
Key Issues
1. Whether disallowance under Section 14A r.w. Rule 8D can be made without the Assessing Officer recording dissatisfaction with the assessee's own computation. 2. Whether the explanation inserted by Finance Act, 2022 to Section 14A, regarding its applicability irrespective of actual exempt income, is retrospective or prospective in nature.
Sections Cited
Section 14A, Section 14A(2), Section 143(3), Section 250, Rule 8D, Finance Act, 2022, Section 9(1)(ii), Section 119
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Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DELHI
Before: SHRI G. S. PANNU & MS. MADHUMITA ROY
Appellant by : Shri Vinod Kumar Bindal, CA Ms. Rinky Sharma, Adv. Respondent by : Ms. Parul Singh, Sr. D.R. Date of Hearing 26.06.2024 08.07.2024 Date of Pronouncement O R D E R PER MS. MADHUMITA ROY – JUDICIAL MEMBER :
The instant appeal filed by the Revenue is directed against the order dated 28.03.2023 passed by the Commissioner of Income Tax (Appeals) – 23, Delhi under Section 250 of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) arising out of the order dated 20.03.2015 passed by the Income Tax Officer, Ward-13(3), New Delhi under Section 143(3) of the Act for Assessment Year 2012-13 whereby and whereunder the disallowance of expenses under Section 14A of the DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 2 - Act to the tune of Rs.2,88,52,028/- made by the Learned AO has been deleted.
We have heard the rival contentions made by the respective parties, we have also perused the relevant materials available on record.
The brief fact leading to the case is this that during the year under consideration the assessee made an investment in unquoted shares of Rs.6,76,85,33,860/- on 31.03.2012. The assessee has suo moto computed the disallowance as per Section 14A of the Act amounting to Rs.17,66,12,717/-. The same was added back in the computation of total income by the assessee while filing the return of income. Exercising the power under the provision of Section 14A(2) of the Act, the Learned AO opined that the claim of expenditure of assessee was incorrect and quantum of disallowance was computed as per Rule 8D of the Income Tax Rules at Rs.20,98,39,135/- and restricted the disallowance to Rs.20,54,64,745/- i.e. to the extent of expenditure claimed by the assessee under the head finance cost and other expenses in the following manner : (i) Direct Expenses Nil (ii) Indirect expenses x Average Investment Average Asset Interest Expenses - 18,55,08,941 Average Investment - 684,49,12,867 Average Asset - 723,05,64,801 18,55,08,941 x 6,84,49,12,867 - 17,56,14,571
DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 3 - 723,05,64,801 (iii) 0.5% of average Investment i.e. - 3,42,24,564 0.5% x 6,84,49,12,867 (i)+(ii)+(iii) 20,98,39,135 This disallowance is restricted to 20,54,64,745 expenditure claimed by the assessee under the head finance cost and other expenses (Addition of Rs.20,54,64,745)
While making disallowance of expenditure under Section 14A r.w.r 8D of the Act, the Learned AO relied upon the judgment passed by the Special Bench in the case of Cheminvest Ltd. vs. ITO reported in 121 ITD 318 (Del) (SB) wherein it has been held that even if there is no income in a particular year, the expenditure incurred is to be disallowed. However, the First Appellate Authority deleted such disallowance made by Learned AO. Hence, the instant appeal before us.
5. At the time of hearing of the instant appeal, the Learned DR relied upon an judgment passed by the ITAT, Guwahati Bench in the matter of ACIT vs. Williamson Financial Services Ltd. reported in [2022] 196 ITD 422 (Guwahati) wherein it has been held that the explanation inserted by Finance Act, 2022 to section 14A with effect from 01.04.2022 providing that provisions shall apply whether or not exempt income has accrued, arisen or received, is clarificatory in nature and thus, applicable retrospectively and therefore, she further argued that in view of the explanation, intentions of legislature is very clear that actual earning or not earning of exempt income is not the condition precedent for making disallowance of expenditure incurred to earn except income and as such DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 4 - explanation inserted by the Finance Act, 2022 to Section 14A though with effect from 01.04.2022 as the same has been declared clarificatory in nature, the provision is having a retrospective effect and therefore, the order passed by Learned AO taking the belief even if there is no income in a particular year, the expenditure incurred has to be disallowed has been supported by her.
6. On the other hand, the assessee’s Counsel submitted before us that the assessee in the year under consideration has not received any dividend, therefore, the provision of Section 14A of the Act are not applicable to the instant case in hand. He further argued that before enhancing the disallowance under Section 14A of the Act from Rs.17,66,12,717/-, Rs.20,54,64,745/- though the Assessing Officer is required to clarify as to how the computation arrived at by the assessee was incorrect and how he has not been satisfied with the correctness of the claim of the assessee, he made the disallowance in a routine and mechanical manner. In that view of the matter it has been submitted by the Learned AR that the order passed by the Learned AO is not sustainable and deletion of addition made by Learned CIT(A) has been supported by him.
We have heard the rival submissions made by the respective parties, we have also perused the relevant materials available on record.
DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 5 - 8. We find that while deleting the enhancement of disallowance applying under Section 14A(2) of the Act, the Assessing Officer has not recorded as to how the computation arrived at by the appellant was incorrect and how he was not satisfied with the correctness of the claim. It is the settled principle of law that the most fundamental requirement of sub Section 2 of Section 14A r.w. Section 8D is this that the AO should record his dissatisfaction with the correctness of the claim of assessee in respect of the expenditure and to arrive at such disallowance. The Hon’ble Apex Court in the case of Maxopp Investment Ltd. vs. CIT reported in (2018) 91 taxmann.com 154/254 taxmann.com 325 held that having regard to the language of section 14A(2) of the Act, read with rule 8D it is clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct.
9. We note that satisfaction of the AO is Sine qua non for invoking Rule 8D of the Rules and on the score alone the deletion of addition made by Learned CIT(A) in the instant case is found to be correct.
10. Apart from that, the argument advanced by the Learned DR that the Explanation inserted by Finance Act, 2022 the Section 14A w.e.f 01.04.2022 to this effect that whether or not exempt income has accrued, arisen or received, is clarificatory in nature and thus, applicable with retrospective effect, reliance was placed on the Guwahati Bench, ITAT in DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 6 - the matter of ACIT vs. Williamson Financial Services Ltd. (supra) cannot be accepted in view of this particular fact that the judgment passed by the Hon’ble Jurisdictional High Court in the case of PCIT vs. Era Infrastructure (India) Ltd. in Appeal No. 31445 of 2022, which has been relied upon by the assessee, copy whereof has been annexed to the paper book filed before us speaks otherwise. It has been decided in that particular judgment that amendment of Section 14A 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. While dealing with this particular issue, the Hon’ble Court has been pleased to observe as follows:
“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.
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 DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 7 - 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.
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."
DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 8 -
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. 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(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.
DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 9 - 14. 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] .) 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 DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 10 - 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) 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 DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 11 - 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 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, DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 12 - 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.
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 PCIT vs. IL & FS Energy Development Company Ltd (supra).”
It further appears from the above that the Hon’ble Delhi High Court while deciding the application of the amendment of Section 14A being prospective in nature relied upon the judgment passed by the Hon’ble Supreme Court in the case of M. M Aqua Technologies Ltd. Vs. Commissioner of Income Tax, Delhi-III, 2021 SCC OnLine SC 575.
We find that the explanation inserted by Finance Act, 2022 to Section 14A w.e.f 01.04.2022 providing that provisions shall apply whether or not exempt income has accrued, arisen or received, is clarificatory in nature is, therefore, cannot be applied with retrospective effect in view of the judgment, passed by the Hon’ble Delhi High Court as relied upon by the Learned AR in the case of Era Infrastructure (India) Ltd. (supra)
In that view of the matter, the judgment relied upon by the Learned DR passed by the Guwahati Bench in the matter of ACIT vs. Williamson Financial Services Ltd. (supra) is found to have no manner of application.
DCIT vs. Jindal ITF Ltd. Asst.Year :2012-13 - 13 - 14. Having regard to the entire aspect of the matter, we, therefore, find that the order passed by the Learned CIT(A) in deleting the addition made by the AO is found just and proper so as to warrant interference.
The appeal preferred by the Revenue is found to be devoid of any merit and thus dismissed.