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Before: Shri S.S. Viswanethra Ravi & Shri S.R. Raghunatha
O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order dated 29.11.2023 passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi for the assessment year 2020-21. 2. Ground No. 1 is general in nature and requires no adjudication.
Ground Nos. 2 to 12 raised by the assessee in challenging the action of the ld. CIT(A) in confirming the disallowance made under section 2 14A of the Income Tax Act, 1961 [“Act” in short] r.w. Rule 8D(2)(iii) of the Income Tax Rules, 1962 [“Rule” in short] in the facts and circumstances of the case.
The Assessing Officer observed that there was no investment in the year under consideration and the investment of ₹.2379,14,33,237/- has potential to earn exempt income. Taking support from the CBDT Circular No. 5/2014 dated 11.02.2014, the Assessing Officer show-caused the assessee why disallowance of expenses should not be made even when the assessee, in a particular year, has not earned any exempt income and it was explained that no disallowance is required to be made, since no exempt income earned in the year under consideration. The Assessing Officer did not accept the same and proceeded to compute the disallowance by invoking Rule 8D(2)(iii) being the average of opening and closing balance as on end of financial year to an extent of ₹.16,81,426/-. The ld. CIT(A) confirmed the order of the Assessing Officer in making the disallowance by invoking the methodology under Rule 8D.
5. As not satisfied with the order of the ld. CIT(A), the assessee is in appeal before the Tribunal by raising the above mentioned grounds.
6. The ld. AR Shri R. Sivaraman, Advocate submits that there was no exempt income earned and the disallowance as confirmed by the ld. CIT(A) is not justified. He drew our attention to the decision of the Hon’ble High Court of Delhi in the case of PCIT v. Era Infrastructure (India) (P.) Ltd. [2022] 141 Taxmann.com 289 (Delhi) and submits that the Hon’ble High Court, in similar set of facts, held the amendment by inserting Explanation through Finance Bill, 2022 is applicable only from 01.04.2022 relevant to the assessment year 2022-23, but, not to earlier years. He argued that the assessment year under consideration is 2020-21 and the CBDT circular as relied on by the Assessing Officer with reference to Explanation inserted under section 14A of the Act is not applicable to the year under consideration, as held by the Hon’ble High Court of Delhi in the case of PCIT v. Era Infrastructure (India) (P.) Ltd. (supra).
7. The ld. DR Shri R.V. Aroon Prasad, Addl. CIT submits that the Explanation inserted through Finance Bill, 2022 is retrospective in nature as clarified by the CBDT in its circular and it was correctly followed by the Assessing Officer. He supported the order of the ld. CIT(A).
Heard both the parties, perused the material available on record. Admittedly, Explanation to section 14A of the Act was inserted through Finance Bill, 2022 making it applicable from 01.04.2022. The Explanation clarifies that “notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have 4 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, in our opinion, explanation is clear about making disallowance under section 14A of the Act, where the income not forming part of the total income, also making it applicable from 01.04.2022 relevant to the assessment year 2022-23. The Hon’ble High Court of Delhi, while taking into consideration the said amendment in the case of PCIT v. Era Infrastructure (India) (P.) 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.]
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.
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 6 I.T.A. No.173/Chny/24 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.
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. 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 (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. 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 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) 9. 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 2020-21 and has no 8 I.T.A. No.173/Chny/24 applicability of Explanation inserted to section 14A of the Act. Therefore, the disallowance computed by the Assessing Officer under Rule 8D(2)(iii) and as confirmed by the ld. CIT(A) is not justified. Thus, the grounds raised by the assessee are allowed.
10. Ground Nos. 13 to 20 raised by the assessee in challenging the action of the ld. CIT(A) for non-adjudication of the issues relating to addition made towards disallowance of PF, Bonus and interest on cash credit.
11. The ld. AR submits that the disallowance relating to PF, bonus and interest on cash credit were disallowed under intimation passed under section 143(1) of the Act. The assessee filed an appeal before the ld. CIT(A) challenging the said disallowances. Again, when the case of the assessee was selected for scrutiny, the Assessing Officer made other disallowances taking into account income determined under intimation by separate order passed under section 143(3) of the Act. The assessee preferred separate appeal against the said order passed under section 143(3) of the Act before the ld. CIT(A) and raised grounds challenging the disallowance relating to PF, Bonus and interest on cash credit in Form No. 35 relating to scrutiny assessment passed under section 143(3) of the Act. The assessee brought to the notice of the ld. CIT(A) to adjudicate the 9 said disallowance since the disallowances are part of scrutiny assessment order since the Assessing Officer has taken total income as computed under section 143(1) of the Act. However, the ld. CIT(A) held that the appeal against intimation under section 143(1) of the Act is separate and independent and by holding so, did not adjudicate the grounds relating to PF, bonus and interest on cash credit in the impugned order. The ld. AR referred to the order of the ITAT Delhi Benches in the case of The South India Club v. ITO in ITA No. 354/Del/2024 vide order dated 22.05.2024 and argued that the Coordinate Bench of ITAT, Delhi held that intimation order under section 143(1) of the Act merges with scrutiny assessment order under section 143(3) of the Act and the appeal filed against intimation become infructuous. The ld. AR argued that since the order passed under section 143(1) of the Act was merged, the ld. CIT(A) has to adjudicate the same, as there was no adjudication and he prayed to remit the matter to the file of the ld. CIT(A) for fresh adjudication.
12. The ld. DR relied on the order of the ld. CIT(A).
13. Heard both the parties and perused the material available on record. We note that intimation under section 143(1) of the Act in which the CPC disallowed claims of the assessee relating to PF, Bonus and 10 interest on cash credit against which, the assessee preferred an appeal before the ld. CIT(A). Subsequently, the Assessing Officer made other disallowances taking into account the same income as made under section 143(1) of the Act by separate order passed under section 143(3) of the Act. The assessee preferred separate appeal against the said order passed under section 143(3) of the Act. The contention of the ld. AR is that once scrutiny assessment proceedings is taken up and completed under section 143(3) of the Act, the intimation order passed under section 143(1) of the Act automatically merges with the scrutiny assessment passed under section 143(3) of the Act. We have perused the case law relied on by the ld. AR in the case of The South India Club v. ITO (supra), wherein, on similar facts and circumstances, the Delhi Benches of the Tribunal held as under: 10. On the other hand, the Ld. DR submitted that there is no decision of jurisdictional High Court available on the issue of initiation of regular assessment by issue of notice u/s 143(2) of the Act, also does not preclude from passing of the order u/s 143(1) of the Act, therefore, he heavily relied on the findings of the Ld. CIT(A). Further, with regard to pending assessment at the time of granting of registration issue is concern, he agreed that the assessment was pending at the time of grant of registration, however, he submitted that whether other conditions for claiming deductions u/s 11 are fulfilled or not has to be verified, therefore, he supported the findings of Ld. CIT(A) in this regard. 11. Considered the rival submissions and material placed on record. We observe that the issue raised by the assessee that the order passed u/s 143(1) of the Act, otherwise called as intimations, in which the CPC has denied the benefit claimed u/s 11 of the Act with the observation that the audit report in form 10B was not filed on time. This is fact on record that the assessee has not filed the form 10B along with the return of income due to the fact that it did not had the registration u/s 12A, and the assessee was claiming the benefits under the concept of mutuality. We observe that the assessee has applied for registration before filing the return of income for the current assessment year on 27.03.2019 and subsequently filed the 11 I.T.A. No.173/Chny/24 ROI on 30.03.2019. The ROI was processed u/s 143(1) of the Act on 10.11.2019 and denied the benefit u/s 11 on the basis of not filing the Form 10B on time.
12. Further we observe that the statutory notice u/s 143(2) was issued on 22.09.2019. Further notices u/s 142(1) were issued in order to proceed with the regular assessment. Accordingly the assessment u/s 143(3) was completed. When regular assessment was completed and the relevant intimation issued u/s 143(1) will automatically merges with the assessment passed u/s 143(3). Therefore, it loses its relevance once the regular assessment is processed and it is only an intimation towards the accuracy of the information submitted by the assessee. In the given case, the assessee has claimed deduction u/s 11 and failed to file the form 10B along with the ROI. Based on the above observation, the claim of the assessee was denied by the AO in sec.143(1) proceedings. Therefore, there is no denial of fact that AO can make the above disallowance, however, the validity of the intimation issued u/s 143(1) is limited to mere intimation of correctness and accuracy of the income declared in ROI and its accuracy based on the information submitted along with the ROI. It does not carry the legitimacy of an assessment. When the assessment was processed under regular assessment then it loses its individuality and merges with the regular assessment. We are in agreement with the findings of Ld CIT(A) that the intimation u/s 143(1) merges with the order passed u/s 143(3) of the Act and the appeal against the above intimation becomes infructuous. In our view, he should have stopped with the above findings and should not have proceeded to decide the issue on merits, because it is brought to his knowledge that the assessee has filed appeal against the regular assessment order. Therefore, he has travelled beyond the mandate. The issue of allowability of section 11 is already considered in the regular assessment and that issue is already in appeal before FAA. Therefore, reviewing the same is uncalled for.
13. Coming to the submissions of the Ld AR, the assessee also not disputing the fact that the intimation merges with the regular assessment when the proceedings are initiated u/s 143(3) of the Act. Therefore, the admitted fact that the appeal against the intimation is infructuous. The grievance of the assessee is that Ld CIT(A) has not stopped with the findings but gave findings on the merits. After considering the submissions, we are also of the view that the findings on allowability u/s 11 is uncalled. Particularly when the issue under consideration is under challenge before another Appellate Authority.
14. Following the above decision of the Delhi Benches of the Tribunal, we hold that in the present case, an appeal filed against the intimation passed under section 143(1) of the Act which is pending, the notice of which is placed at page 56 of paper book, is merged with scrutiny assessment order passed under section 143(3) of the Act, further, the assessee challenged the same disallowances in Form 35 concerning the 12 assessment order passed under section 143(3) of the Act, since no adjudication and in the impugned order. Thus, we direct the ld. CIT(A) to adjudicate the issues relating to addition made towards disallowance of PF, Bonus and interest on cash credit, on merits, by affording an opportunity of being heard to the assessee. Thus, the ground Nos. 13 to 20 raised the assessee are allowed for statistical purposes.
15. Ground No. 21 raised by the assessee in challenging the action of the ld. CIT(A) in confirming non-allowance of credit for TDS to the extent of ₹.84,82,352/-.
16. The ld. AR drew our attention to the submissions made before the ld. CIT(A) at page 88 of the paper book. He submits that the assessee claimed TDS in the return of income as per the details given therein to an extent of ₹.402,94,46,156/-. However, the TDS allowed by rectification order under section 154 of the Act dated 21.12.2022 is only at ₹.402,06,11,108/- and TDS credit disallowed is at ₹.88,35,048/- . The ld. AR pointed out that non-credit of amount of ₹.3,52,696/- being TDS paid by Shriram Equipment Finance Company Limited, which was amalgamated with Shriram Transport Finance Company Limited w.e.f. 01.04.2015 was brought to the notice of the ld. CIT(A) NFAC, but, however, the ld. CIT(A) has directed the Assessing Officer to give TDS credit after verification of the TDS certificates from the deductor showing that the deductors had deducted the tax, which is evident from para 32 at page 47 of the impugned order. The ld. AR submits that the assessee is ready to furnish every details regarding TDS and accordingly prayed to remit the matter to the file of Assessing Officer.
On perusal of the impugned order, we note that the difference of TDS credit between the claim made in the return of income and allowance of TDS by rectification order under section 154 of the Act is ₹.88,35,048/-. Since the assessee could not file various details, i.e., supporting evidences, copies of TDS certificates, etc., considering the facts and circumstances of the case, we deem it proper to remit the matter back to the file of the Assessing Officer for fresh verification in respect of the TDS difference of ₹.88,35,048/-. The assessee is at liberty to file evidence in support of its claim. Thus, ground No. 21 raised by the assessee is allowed for statistical purposes.
Ground Nos. 22 & 23 raised by the assessee in challenging the action of the ld. CIT(A) in confirming in part, the interest charged under section 115P of the Act in the facts and circumstances of the case.
We note that the assessee declared dividend of ₹.158,81,79,152/- on 27.06.2019. The dividend distribution tax was paid on 08.07.2019, within the prescribed time limit of 14 days i.e., from the date of declaration of dividend. The said information about declaration of dividend was wrongly entered in the income tax return as 08.05.2019 instead of 27.06.2019. The ld. CIT(A) directed the Assessing Officer to allow credit of dividend as per details available in OLTAS and upheld the levy of interest under section 115P r.w.s. 115-O of the Act. He observed that the date reported in the income tax return is sacrosanct and cannot be ignored by the Assessing Officer without filing revised return of income within the time stipulated under section 139(5) of the Act. Therefore, he held the interest computed for the delay of two months after the declaration of dividend to the share holders by the company i.e., beyond the time of 14 days as prescribed under section 115-O of the Act, is justified. We note that there is no dispute with regard to the dividend declaration on 27.06.2019 and the payment of dividend distribution tax on 08.07.2019, which is, in our opinion, well within the prescribed time as provided under section 115-O of the Act, but the only error as committed by the assessee is incorrectly filing the date of declaration as 08.05.2019 instead of 27.06.2019 in the return of income. Therefore, no interest is chargeable under section 115P of the Act as there was no delay in paying the dividend distribution tax as per section 115-O of the Act. Thus, the interest levied by the Assessing Officer and confirmed by the ld. CIT(A) is 15 not justified and deleted. Thus, ground Nos. 22 & 23 raised by the assessee are allowed.
Ground No. 24 is consequential in nature and requires no adjudication.