RAJAPALAYAM MILLS LTD.,,VIRUDHUNAGAR vs. DCIT, CORPORATE CIRCLE,, MADURAI

The ld. DR Shri R. Clement Ramesh Kumar, CIT vehemently opposed the submissions of the ld. AR and argued that the Assessing Officer did not apply his mind while completing the original assessment concerning the issue raised by the ld. PCIT under section 263 of the Act and the ld. PCIT rightly held the said assessment order is erroneous and prejudicial to the interest of the Revenue. Further, he argued that the amendment made to section 14A of the Act by Finance Act, 2022 is retrospective effect even though the assessee has not earned any exempt income during the year under consideration. He vehemently argued that the Assessing Officer is required to be made disallowance as required under law as contemplated in Finance Act, 2022. Further, he takes support of Circular No. 5/2014 issued by the CBDT on 11.02.2024, which clearly explains that the disallowance is required to be made even if there is no exempt income. He vehemently argued that the decision of the Hon’ble High Court of Madras in the case of Redington India Limited (supra) is no longer valid in view of the amendment to section 14A of the Act.

Heard both the parties, perused the material available on record. We note that the Assessing Officer issued notice under section 142(1) of the Act as required under law in seeking the details in respect of the claim made by the assessee during the course of original assessment proceedings. The proof of said notice and details sought therein are placed at page 32 of the paper book and in response to which, the assessee clearly stated that there is no exempt income earned during the year under consideration, which is at page 36 of the paper book. Considering the same, the Assessing Officer did not make any disallowance under section 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962. The case of the ld. PCIT is that the Assessing Officer passed the said original assessment order without verifying the applicability of provisions of section 14A of the Act r.w. Rule 8D(2) of the Income Tax Rules vide para 6 of the impugned order. We are not agreeable to confirm the said finding as the proof of examination of the said issue by the Assessing Officer is reflecting through notice under section 142(1) of the Act and also the reply furnished by the assessee. The ld. PCIT brought to the notice of the assessee, Explanation to section 14A of the Act through Finance Act, 2022 vide notice under section 263 of the Act, which is at page 6 of the paper book and in response to the hearing notice, the assessee filed written submission dated 15.03.2024, which was reproduced in the impugned order at page 13 of the paper book, wherein, it was clearly contended that there was no dividend exempt income received in the year under consideration and the amendment made in section 14A of the Act by Finance Act, 2022 is prospective in nature. Therefore, we find that the Assessing Officer examined the issue in detail during the course of original assessment proceedings and by applying the relevant statutory provision as it stood then, made no disallowance under section 14A of the Act.

Regarding the insertion of Explanation to section 14A of the Act by way of Finance Act, 2022, we find that while taking into consideration the said amendment, the Hon’ble High Court of Delhi in the case of PCIT v. Era Infrastructure (India) Ltd. (supra), held that it is settled law that the assessment has to be made with reference to the law, which is in existence at the relevant time. For better understanding, the relevant part of the order from para 4 to 6 are reproduced herein below: 4. 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 PCIT vs. IL & FS Energy Development Company 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.

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 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.

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) "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 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."

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.

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. 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 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) 8. On careful reading of the above decision, we find the facts and circumstances before the Hon’ble High Court are similar to the facts on hand, since the year under consideration before us is 2017-18 and has no applicability of Explanation inserted to section 14A of the Act. Therefore, respectfully following the decision of the Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure (India) (P.) Ltd. (supra), we hold that exercise of jurisdiction by the ld. PCIT under section 263 of the Act is not justified and accordingly the revision order passed under section 263 of the Act is set aside. Thus, grounds raised by the assessee are allowed.

In the result, the appeal filed by the assessee is allowed. Order pronounced on 14th August, 2024 at Chennai.