Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, ‘B’ BENCH, KOLKATA
Before: Shri Rajpal Yadav, Vice-(KZ) & Shri Rajesh Kumar
Per Rajpal Yadav, Vice-President (KZ):- The Revenue is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals)-7, Kolkata dated 19th February, 2020 passed for A.Y. 2012-13. 1 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited
This appeal has been presented before the Tribunal on 24.01.2022. The Registry has pointed out that the appeal is time barred by 615 days. With the assistance of ld. Representatives, we have gone through the record carefully. It is pertinent to note that this period represents COVID period, which has already been condoned by the Hon’ble Supreme Court by exercising its suo motu powers. Therefore, this appeal is not to be treated as time barred.
The Revenue has taken nine grounds of appeal. However, its grievances revolve around two issues, namely- (1) whether ld. CIT(Appeals) was justified in deleting the addition of Rs.3,98,44,628/-, which was added by the ld. Assessing Officer with the aid of Section 68; (2) The ld. CIT(Appeals) has erred in entertaining the additional evidence in violation of Rule 46A of the Income Tax Rules; and (3) The ld. CIT(Appeals) has erred in deleting the addition of Rs.1,35,500/-, which was added by the ld. Assessing Officer with the aid of Section 14A read with Rule 8D.
4. First we take 1st & 2nd fold of grievances. Brief facts of the case are that the assessee has filed its return of income electronically on 13.03.2013 declaring total income of Rs.12,156/- (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited . The case of the assessee was selected for scrutiny assessment and notices under sections 143(2) and 142(1) were issued and served upon the assessee. The ld. Assessing Officer has observed that the assessee-company had issued 39,860 equity shares at the rate of Rs.10/- each and premium of Rs.990/-. It has received share capital of Rs.3,98,44,628/-. The ld. Assessing Officer has observed that he has issued notices under section 131 of the Income Tax Act to the Directors of all the shareholder companies of the assessee. They were asked to appear personally but they did not. After making observation regarding the proceedings, he thereafter reverted towards jurisprudence of Section 68 without much devoting energy to the facts of the assessee’s case. Accordingly, ld. Assessing Officer has made the addition of the share capital.
5. Dissatisfied with the addition, assessee carried the matter in appeal.
6. Ld. CIT(Appeals) has deleted the addition by recording the following finding:- “4.2. I have considered the submission of the AR of the appellant in the backdrop of the assessment order. I have also considered the materials on record in deciding the issue at hand. The brief facts of the case are that share capital introduced in the account of the appellant during the year under consideration amounting to Rs..3,98,44,328/- by the list of share subscribers were treated as unexplained cash credit by the AO u/s 68 of the Act. The reasons for this was because (a) none of the directors of the subscriber companies appeared before the AO u/s 131 of the Act with the required details/documents and (b) the assessee could not offer any explanation as to why the said share application money should not be treated as bogus and un explained cash credit in its books as per the provisions of section 68 of the Act. 3 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited Reliance was placed on various case laws to justify his action (supra). On the other hand, the AR has drawn my attention to the fact that the transfer of impugned shares were not based on any cash transactions but by way of barter transactions as elucidated in the written submission (supra). Since this is a case of cashless transaction, section 68 of the Act cannot be applied in any manner which the AO failed to comprehend. The provisions of section 68 of the Act refers to cash credit in the accounts of an assessee which is not explained or remains unexplained before the concerned AO. The instant case is not on this ground in as much as there was no cash credit but only book adjustments. The case of the appellant is well covered by various judicial decisions in its favour as mentioned in the submission of the AR (supra). Thus in view of the foregoing, the AO is directed to delete the impugned amount of Rs.3,98,44,628/- added u/s 68 of the Act. This ground is allowed”.
7. Dissatisfied with the order of ld. CIT(Appeals), the Revenue has filed the present appeal. Ld. Sr. D.R. has filed written submission, which reads as under:- “The Hon’ble Member, Income Tax Appellate Tribunal - ‘B’ Bench, - 225C, A J C Bose Road Kolkata-700 020 Submission of SR DR in ITA 50/Ko1/2022 : Vishnu Distributors Pvt Ltd Your Honours, The assessment was completed u/s 143(3) on 26/3/2015. A total of 39,860 shares of the assessee were shown to subscribed by and allotted to 18 entities - 10 private limited companies and 8 individuals. Each share having face value of Rs. 10 was shown to be allotted at a premium of Rs.990. In lieu of these shares priced at Rs. 1000 each the assessee received shares of other private limited companies claimed to be equally premium priced. Thus, a barter system was adopted for issue of 39,860 shares. The shares were allotted in consideration other than cash. The CIT(A) did not find merit in AO's decision to add Rs.3,98,44,628 to the income of the assessee u/s 68. Since this is a cashless transaction, CIT(A) was of the opinion that section 68 cannot be applied. Cash Credit: 68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source there of or (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. ’’What is the weight which should be attached to the heading (Cash credits) of Section 68 of the Act? A heading is to be regarded as giving the key to the interpretation of the clauses ranged under it, unless the wording is inconsistent with such interpretation. The headings might be treated as preambles to the provisions following them. Though the Court is entitled to look at the headings in an Act of Parliament to resolve any doubt, they may have as to ambiguous words, the law is clear that those headings cannot be used to give a different effect to clear words in the section where there cannot be any doubt as to the ordinary meaning of the words. The tittle of a chapter be legitimately used to restrict the plain terms of an enactment. The headings prefixed to sections or entries cannot control the plain words of the provision; they cannot also be referred to for the purpose of construing the provision when the words used in the provision are clear and unambiguous; nor can they be used for cutting down the plain meaning of the words in the provision. Only in the case of ambiguity or doubt the heading or sub-heading may be referred to as an aid in construing the provision but even in such a case it could not be used for cutting down the wide application of the clear words used in the provision. Those headings are not meant to control the operation of enacting the words and it may be a wrong to permit them to do so. It is in this background, we have to look at the above provision in particular opening words of the Section. What is referred to is where any sum is found credited in the books of an assessee, and in the end what is mentioned is, the sum so credited may be charged to income-tax. Therefore, in the body of the Section, the word used is either found credited or so credited, there is no indication in the Section that such a credit should be a cash credit. It may be a cash credit or it may be a credit representing the value of the supplies made by the suppliers on credit. The essence is that the credit should be shown in the account and that would satisfy the requirement of Section 68 of the Act. Once the credit so mentioned in the Section is found to be not supported by any acceptable evidence, then the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”. - [ Karnataka High Court - Rekha Krishnaraj -vs.- The Income Tax Officer on 13 March, 2013] This is precisely what has been done in the instant case by the assessing officer. The assessee company issued its shares to privately solicited parties who are trustworthy and close to the assessee and had balance sheets apparently loaded with shares of private limited companies. Setting aside all norms of ROC for increasing share capital, shares of assessee were shown to be transferred out as subscribed by 18 such entities consisting of private limited companies and individuals, with apparently no credible business or creditworthiness to hold shares of such value. So what is the motive of the entire transaction? Why the churning of balance sheet was necessary by showing allotment of shares fancily priced without basis? Who are these 18 entities whose minds and balance sheets match with the assessee to indulge in this absurd barter? What is the business rationale for this share barter having a total declared value of 5 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited Rs.3,98,44,628? Neither the assessee nor these 18 entities carried on real business or enterprise for earning profit. These 19 entities of the same feather flocked together to create a flimsy stage show of share-barter having a book value of Rs.3,98,44,628 only by executing a 'sale agreement' of a Rs. 10 stamp paper. The fact remains that the sum of Rs.3,98,44,628/- has been credited into the books of the asessee. The credit of this sum is not from credit-worthy source. For this reason the sum so credited was charged to income-tax as the income of the assessee of that previous year by the assessing officer. The CIT(A) failed to take that extra step of wanting to see beyond what is apparent, to raise his inquiry above the incredible, being a finding authority, and extend his quest for the real intention of these transactions through the exploration and scope and interpretation of section 68 in the context of the facts of the case. The assessing officer issued notices u/s 133(6) 14 share subscribers, calling for certain evidences, among which were: (i)copy of share application Form and also copy of share allotment letter. (ii)details of shares that have been allotted with distinctive nos. of shares. (iii)name address & PAN of your company's Director and relationship with the director of the assessee company. However, responses were received from 18 share subscribers (4 extra) in perfectly identically worded letters in the office of the assessing officer, between 13/2/2015 to 16/2/2015. The synchronised response provided the following particulars only, avoiding the 3 crucial details as reproduced just above. PAN copy of sale agreement copy of Income Tax Return Acknowledgement copy of balance sheet and profit & loss account Each of the 18 responses included a ’sale agreement’ made on 31/3/2012 on a Rs.10 non-judicial stamp paper Notarised by Notary Public Sri P K Mitra and signed by the concerned share subscriber. All these 18 Non- Judicial Stamp Papers of Rs.10, bearing identification numbers ’84AA 551073’ to ’84AA 551090’ in perfect serial were purchased and drafted in absolute precision in the same language to make the notarised ’sale agreements’ which says that the subscriber “purchased” shares of the assessee each worth Rs.1000, in ’’consideration" of shares held by the subscriber in other companies (as named in the ’sale agreement’). [PaperBook Pages: ]. The summary of the responses is given below for an overview of these 18 share subscribers who are legal entities on paper, taking advantage of the existing law of the land, but are hollow from inside when it comes to credit-worthiness for being able to hold shares for bartering the purchase of assessee's shares. 'Revenue from operations' of these share subscribers, wherever it is claimed, were from sale of shares of worthless private limited shares featuring in their books/accounts. The reserves and surplus of these share subscribers consist of share premium 6 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited amount that is generated through purchase and sale of shares of other paper companies through the complex process of layering of funds for benefitting willing beneficiaries like our assessee. The assets and liabilities of these subscriber companies and individuals consists of shares and loans of private limited companies. The assesing officer issued summons u/s 131 to some of these share subscriber companies' Directors, but nobody attended for personal examination by the assessing officer. Share Subscribers' credit- worthiness Shares swapped for Share No.of the purcahse of Total subscribers shares Total value assess’s shares Income Nature of income Lagan Suppliers Pvt Ltd 1400 1400000 Ajanta Sales Pvt Ltd 32,490 Share sale Debasis Sarkar 2000 2000000 Dovar Tie up Pvt Ltd 1,87,130 Brok &Comm Amar Nath Active Tradecom Pvt Dalmia 2000 2000000 Ltd 1,86,160 Brok &Comm Octav Vinimay Starpoint Dealmark Pvt Ltd 1700 1700000 Pvt Ltd 26,160 Share sale Active Tradecom Pvt Baby Jaiswal 2000 2000000 Ltd 1,94,120 Consultancy fee Utmost Tradecomm Pvt Bajrang Medicare Ltd 2900 2900000 Pvt Ltd 0 Tedium Commercial Pvt Chirayu Traders Pvt Ltd 2900 2900000 Ltd 0 Gangotrin Sales Newedge Vinimay Pvt Ltd 1970 1970000 Pvt Ltd 23,540 Share sale Kamal Kishore Sunflower Vintrade Ladha 1800 1800000 Pvt Ltd 1,88,100 Brok &Comm Moonlight Commercial Pvt Skyrise Vincome Pvt Ltd 2840 2840000 Ltd 0 - Shristidata Tradelink Pvt Bajrang Medicare Ltd 2535 2535000 Pvt Ltd 0 Natraj Mercantile Pvt Ltd 1560 1560000 Ajanta Sales Pvt Ltd Int Unsec Loan Varsha Dealers Pvt Ltd 3390 3390000 Vedika Steel Pvt Ltd 0 - Jhabarmal Sunflower Vintrade Agarwal 2000 2000000 Pvt Ltd 2,57,310 Brok &Comm Strenuous Exim Citygreen Agro Pvt Pvt Ltd 3765 3765000 Ltd 0 - Jhuma Dey 1100 1100000 Dovar Tie up Pvt Ltd 1,94,280 Trading Hemraj Financial Pvt Bhola Jaiswal 2000 2000000 Ltd 1,87,570 Brok &Comm Hemraj Financial Pvt Chaitali Basak 2000 2000000 1,92,220 JobWork Ltd The issue of share capital is governed by the Companies Act - Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to any persons, if it is authorised by a special resolution, (whether or not those persons include the existing shareholders or employees under stock option scheme), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed. The shares of the assessee was shown to be bartered through standard uniform instruments of Agreement of Rs. 10 NJSP, executed on the 31st March 2012. While taking all the legal immunity of a Company incorporated under the Companies Act, the strict formalities required for (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited issue of share capital was completely done away with. Thus these apparent share swap was not made in concurrence with the Rules of the Companies Act and thus are not legitimate. The only real gain achieved is credit of Rs.3,98,44,628 in the books of the assessee. By placing reliance on the interpretation of section 68 in the judgment of Karnataka High Court in the case of Rekha Krishnaraj vs The Income Tax Officer on 13 March, 2013, I pray of reinstatement of the order of the assessing officer by dismissing the order of the CIT(A).
Yours faithfully, Partha P Barman Sr. D.R.
On the other hand, ld. Counsel for the assessee submitted that the assessee has not filed any fresh evidence, rather it has only filed the written submission, which has been considered by the ld. CIT(Appeals). All other materials are already available before the ld. Assessing Officer. The stand of the assessee is that it has not received any cash or cheque, rather share transaction has been carried out through journal entry. He further submitted that expression, ‘any sum’, employed under section 68 does not represent transactions carried out through journal entry. It only embraces in itself the transactions through cash or by cheque. For buttressing his contention, he relied upon the two recent judgments of the Hon’ble Calcutta High Court in the case of Pr. CIT -vs.- Alishan Steels Pvt. Ltd. and Pr. CIT -vs.- M/s. Abhijeet Enterprise Ltd., copies of both the judgments have been placed on record.
We have duly considered the rival contentions and gone through the record carefully. There is no dispute with regard to the fact that the assessee has not received cash or cheque for sale of (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited its shares. It has transacted the shares through barter system. This aspect has been considered by the Hon’ble Jurisdictional High Court in its recent judgment, i.e. IA No. GA/1/2024, GA/2/2024. It is a very brief order and we deem it appropriate to take note of it, which reads as under:- “IN THE HIGH COURT AT CALCUTTA SPECIAL JURISDICTION (INCOME TAX) ORIGINAL SIDE ITAT/50/2024 IA NO: GA/1/2024, GA/2/2024 PRINCIPAL COMMISSIONER OF INCOME TAX 1 KOLKATA VS ALISHAN STEELS PVT LTD BEFORE: THE HON’BLE THE CHIEF JUSTICE T.S. SIVAGNANAM And THE HON’BLE JUSTICE HIRANMAY BHATTACHARYYA Date : 19th February, 2024. Appearance: Mr. Om Narayan Rai, Adv. Mr. Amit Sharma, Adv. .. .for appellant Mr. Ramesh Kr. Patodia, Adv. Ms. Megha Agarwal, Adv. .. .for respondent The Court We have heard learned Counsel on either side. It appears that there is a delay of 1132 days in filing the appeal, though the explanation offered is not fully satisfactory, since this appeal has been filed under Section 260A of the Income Tax Act, we are required to examine as to whether any substantial questions of law arise for consideration. Therefore, we exercise discretion and condone the delay in filing the appeal. The application is allowed. This appeal filed by the Income Tax Department is directed against the order dated 18.3.2020 passed by the Income Tax Appellate Tribunal B Bench, Kolkata in for the assessment year 2012-13. The revenue has raised the following substantial question of law for consideration :-
(A.Y. 2012-2013) Vishnu Distributors Pvt. Limited “i) Whether the Hon’ble Tribunal has substantially erred in law in upholding the decision of the Learned CIT (Appeals)-9, Kolkata thereby deleting the addition of Rs.6,00,00,000/- under Section 68 of the Income Tax Act, 1961 as unexplained cash credit in the form of share capital and share premium only on the ground that no cash or cheque was actually received by the respondent assessee and the purchase of share assets and allotment of share by the assessee was under barter system ? After we have elaborately heard the learned Advocates for the parties we have no hesitation to hold that substantial question of law raised in this appeal has to be answered against the appellant/revenuer in the light of the decision of this Court in ITAT/187/2023 dated 17.11.2023 in the case of ITAT/187/2023 PRINCIPAL COMMISSIONER OF INCOME TAX 1, KOLKATA VS. M/S ABHIJEET ENTERPRISE LTD. Thus, following the decision the appeal filed by the revenue is dismissed. (T.S. SIVAGNANAM) CHIEF JUSTICE
(HIRANMAY BHATTACHARYYA, J.”
10. Apart from this judgment, there is one more judgment of the Hon’ble Jurisdictional High Court, which is also in the same line. We deem it appropriate to take note of that also, which reads as under:- “IN THE HIGH COURT AT CALCUTTA SPECIAL JURISDICTION (INCOME TAX) ORIGINAL SIDE ITAT/187/2023 IA NO: GA/1/2023, GA/2/2023 PRINCIPAL COMMISSIONER OF INCOME TAX 1, KOLKATA VS M/S ABHIJEET ENTERPRISE LTD BEFORE: 10 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited THE HONBLE THE CHIEF JUSTICE T.S. SIVAGNANAM And THE HONBLE JUSTICE HIRANMAY BHATTACHARYYA Date : 17 TH November, 2023 Appearance : Mr. Tilak. Mitra, Adv. ...for appellant Mr. Subhas Agarwal, Adv... .for respondent GA/1/2023 The Court : - We have heard Mr. Tilak Mitra, learned standing Counsel for the revenue/appellant and Mr. Subhas Agarwal, learned Advocate for the respondent/assessee. There is a delay of 1042 days in filing the appeal. Though the reasons given in the petition are not fully convincing, since the appeal has been filed under Section 260A of the Income Tax Act, (the Act) and they are required to examine as to whether any substantial questions of law arise for consideration, we exercise our discretion in the matter and condone the delay in filing the appeal. ITAT/187/2023 This appeal by the revenue is directed against the order dated 27th March, 2019 passed by the Income Tax Appellate Tribunal “C” Bench Kolkata (the Tribunal) in for the assessment year 2013-14. The revenue has raised the following substantial questions of law for consideration:- Whether the Learned Tribunal has erred in law and fact in (i) setting aside the order of the CIT (A) with limited direction to invoke section 68 of the Act only if he is satisfied about actual receipt of sum by the assessee, in acquiring investments and rights? Whether the Learned Tribunal has erred in law and fact in (ii) treating the transaction through shares as beyond the ambit of section 68 of the Act, ignoring that ‘shares’ tantamount ‘to money’ here as a medium of exchange which is a mode of circumventing the said provisions? Whether the Learned Tribunal has erred in law and fact in (iii) deleting the addition under section 68 of the Act, without appreciating the fact that section 68 not only includes cash credit but also include a credit representing the value of shares on credit?
After we have elaborately heard the learned Advocate for the appellant we find learned Tribunal was right in allowing the assessee’s appeal to the extent indicated by taking note of the various decisions of the High Court on the very same subject. In this regard, we refer to the decision of the High Court At Madras in V.R. Global Energy (P) Ltd. vs. ITO, Corporate Ward 3(4), Chennai 407 ITR 145 (Madras). It was held that when the assessee allotted share to a company in settlement of their existing liability of assessee to 11 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited the said company, since no cash was involved in the transaction of said allotment of shares, conversion of this liability in which share capital and share premium could not be treated as unexplained cash credits under Section 68 of the Act. The Revenue filed an appeal against the said judgement and the same was dismissed by the HonTjle Supreme Court in ITO vs. V.R. Global Energy (P) Ltd. [2020] 113 taxmann.com 31 (SC). The decision of the Hon’ble Division Bench of the High Court of Delhi in case of CIT vs. Ritu Anurag Agarwal, 2009(7) TMI 1247, Delhi High Court, the same also stands in aid to the case of the respondent/assessee. The decision of the Hon’ble Division Bench of this Court in Jatia Investment Co. Vs. CIT (1994) 206 ITR 78 (Cal) will also support the case of the respondent/assessee. In the said decision, the Court found that cash did not pass at any stage though entries were made in cash book showing payment and receipts; but since the entries made a complete round, no passing of cash was necessary for the purpose of making entries. Further, it was held that if there was no real cash entry on credit side of the cash book by merely an emotional or fictitious cash entry, as admitted by the Income Tax Officer, there is no real credit to cash, to its cash book the question of inclusion of the amount of the entry as unexplained cash credit cannot arise. In the light of the above decision, the view taken by the learned Tribunal was perfectly in order and sustainable. Thus, we find there is no ground to interfere with the order passed by the learned Tribunal. Accordingly, the appeal is dismissed and the substantial questions of law are answered in favour of the revenue. The portion of the order and direction of the learned Tribunal remanding the matter for a limited purpose is affirmed. Consequently, the applications stand closed. (T.S. SIVAGNANAM, C.J.) (HIRANMAY BHATTACHARYYA, J.)
11. The ld. Counsel for the assessee has demonstrated that no fresh evidence was submitted before the ld. CIT(Appeals). Only books were appraised to the ld. 1st Appellate Authority in order to demonstrate the shares were sold through journal entry. Therefore, respectfully following the decision of the Hon’ble Jurisdictional High Court, we do not find any error in the order of the ld. CIT(Appeals) and first two-folds of grievances summarized by us are rejected.
(A.Y. 2012-2013) Vishnu Distributors Pvt. Limited 12. In the next fold of grievance, the issue is that the ld. Assessing Officer has made disallowance of Rs.1,35,500/- under section 14A read with Rule 8D.
13. The ld. CIT(Appeals) has deleted this disallowance by observing that there is no exempt income in this year. This aspect is squarely covered by the recent decision of the Hon’ble Delhi High Court, wherein it has been held that if no exempt income is being earned by the assessee, then, no disallowance is to be made. We take note of the decision of the Hon’ble Delhi High Court in the case of Pr. CIT -vs.- M/s. Era Infrastructure (India) Ltd. in ITA 204/2022 & AM APPL. 31445/2022. The discussion made by the Hon’ble High Court reads as under:- “3. He submits that the ITAT erred in relying on the decision of this Court in PCIT vs. IL & FS Energy Development Company Ltd., 2017 SCC Online Del 9893 (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 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; (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited (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.
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)
(A.Y. 2012-2013) Vishnu Distributors Pvt. Limited 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:
(A.Y. 2012-2013) Vishnu Distributors Pvt. Limited “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 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited 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 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)
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 17 (A.Y. 2012-2013) Vishnu Distributors Pvt. Limited Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 as follows:
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”.
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)
(A.Y. 2012-2013) Vishnu Distributors Pvt. Limited 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 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, 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).
MANMOHAN, J MANMEET PRITAM SINGH ARORA, JULY 20, 2022”
Therefore, respectfully following the decision of the Hon’ble Delhi High Court, we do not find any error in the order of the ld. CIT(Appeals). This ground of appeal is also rejected.