Religare Enterprises Ltd., New Delhi V. DCIT, Circle- 21(1), New Delhi

CO 27/DEL/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 3073 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 5 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 28-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 04-08-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 22-02-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ROHIT JAIN
• Keywords: Depreciation; Earning of tax free income; Period of limitation; Retrospective amendment; Rule 8D; Capital Gains
• Section: 147; 2; 14A; 2(A)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘F’ NEW DELHI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA: ACCOUNTANT MEMBER ITA No.7552/Del/2018 Assessment Year: 2014-15 Deputy Commissioner of Income-tax, Circle-21(1), New Delhi Vs. M/s. Religare Enterprises Ltd., 2 nd Floor, Rajlok Building, 24-Nehru Place, New Delhi-110019 PAN :AAACV5888N (Appellant) (Respondent) Cross-Objection No.27/Del./2022 ( In ITA No.7552/Del/2018 ) Assessment Year: 2014-15 M/s. Religare Enterprises Ltd., 2 nd Floor, Rajlok Building, 24-Nehru Place, New Delhi-110019 Vs. Deputy Commissioner of Income-tax, Circle-21(1), New Delhi PAN :AAACV5888N (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JUDICIAL MEMBER: Captioned appeal by the Revenue and cross-objection by the assessee arise out of an order dated 10.09.2018 of learned Assessee by Shri Rohit Jain & Ms. Somya, Jain CA Respondent by Shri T. Kipgen, CIT (DR) Date of hearing 05.08.2022 Date of pronouncement 29.08.2022 2 ITA No. 7552 & CO. 27/Del./2018 Commissioner of Income-Tax (Appeals)-7, New Delhi pertaining to assessment year 2014-15. 2. At the outset, we must observe, learned Departmental Representative has raised an issue regarding maintainability of the cross objection on the ground of delay. Rebutting the submission of learned Departmental Representative, learned counsel for the assessee drew our attention to column no. 7 of Memorandum of cross-objection in Form No. 36A and submitted that assessee was served with notice of appeal filed by the Revenue on 26.10.2021 and copy of the Memorandum of Appeal filed by the Revenue was served on the assessee on 27.12.2021. Whereas, he submitted, assessee has filed the cross objection on 23.02.2022. He submitted, since, the limitation period for filing the cross objection fell during the lockdown period of Covid-19, the period of limitation was extended by virtue of the order of the Hon'ble Supreme Court. Thus, he submitted, there is no delay in filing the cross-objection. 3. Having considered rival submissions, we find, assessee was served with notice of revenue’s appeal on 26.10.2021. So, ordinarily, assessee should have filed the cross-objection within a period of 30 3 ITA No. 7552 & CO. 27/Del./2018 days from the date of receipt of notice of revenue’s appeal. However, at the relevant point of time, there was imposition of restrictions due to surge of Covid-19. 4. Considering the difficulties faced by the litigants in keeping date with period of limitation prescribed for filing petition, applications, suits, appeals etc. the Hon'ble Supreme Court suo motu took cognizance of the issue and excluded the period from 15.03.2020 till 28.02.2022 for computing the period of computation. Thus, in view of the aforesaid order of the Hon'ble Supreme Court, there is no delay in filing the cross-objection. Accordingly, we admit the cross-objection for adjudication on merits. 5. The common dispute arising in revenue’s appeal and assessee’s cross-objection relates to disallowance made under Section 14A of the Income-Tax Act,1961 read with Rule 8D of the I.T. Rules. 6. Briefly, the facts are, the assessee is a resident corporate entity. As stated by the assessing officer, the main business of the assessee is to make investments in group companies. For the assessment year under dispute, assessee filed its return of income on 28.11.2014, declaring income of Rs.18,64,44,500. 4 ITA No. 7552 & CO. 27/Del./2018 7. In course of assessment proceedings, while verifying the return filed by the assessee, the assessing officer noticed that in the year under consideration, assessee has earned exempt income by way of dividend amounting to Rs.45,06,37,556. Whereas, suo motu, assessee has disallowed an amount of Rs.193,75,05,098 under Section 14A of the Act, being expenditure attributable to exempt income earned during the year. However, being of the view that the disallowance made by assessee is not in accordance with Rule 8D, assessing officer called upon the assessee to furnish the details and explain why disallowance should not be made by applying Rule 8D. Being unsatisfied with the submissions of the assessee, the assessing officer observed that the assessee has incurred finance cost of Rs.1,40,28,73,862 on account of interest on non-convertible debentures (NCDs). Whereas, it has only considered a part of such interest cost for the purpose of disallowance under Section 14A. Thus, he concluded that the entire interest expenses has to be disallowed. Accordingly, he disallowed an amount of Rs.28,63,13,621 being interest on CCDs in addition to the amount already disallowed by the assessee. The assessee contested the aforesaid disallowance before 5 ITA No. 7552 & CO. 27/Del./2018 first appellate authority. The main plank of assessee’s argument before first appellate authority was to the effect that disallowance of expenditure under Section 14A cannot exceed the quantum of exempt income earned during the year. Though, learned Commissioner (Appeals), in principle, accepted the proposition that disallowance of expenditure under Section 14A cannot exceed the exempt income earned during the year, however, considering the fact that the assessee suo motu has disallowed an amount of Rs.193,75,05,498, learned Commissioner (Appeals) restricted the disallowance to that amount by deleting the additional disallowance made by the assessing officer. 8. Before us, reiterating the stand taken before the first appellate authority, learned counsel for the assessee submitted that disallowance under Section 14A cannot exceed the quantum of exempt income earned during the year. For such proposition, he relied upon the decision of Hon'ble jurisdictional High Court in case of Joint Investment Pvt. Ltd. Vs. CIT 372 ITR 692 (Del.). Without prejudice, he submitted, the additional disallowance made by the assessing officer is unsustainable as assessee has utilized interest free fund available with it to make investment in non-convertible debentures. 6 ITA No. 7552 & CO. 27/Del./2018 He submitted, the fund generated from NCDs were used for issuing ICDs to group companies and investment in FDs from which the assessee had earned interest income of Rs.32.87 crores, which is taxable. Thus, he submitted, since, there is a positive interest income, no disallowance of interest cost could have been made. 9. Learned Departmental Representative, in addition to his oral submission has filed written submissions. In sum and substance, the learned Departmental Representative submitted that, in view of the amendment made to Section 14A of the Act by Finance Act, 2022, disallowance of expenditure has to be made irrespective of the fact whether or not exempt income is earned during the year. For the sake of completeness the submissions of learned Departmental Representative are reproduced hereunder: “It is respectfully submitted, as under: 1. It is respectfully submitted that amendments in section 14A of the Income-tax Act, 1961 (‘the Act’) by the Finance Act, 2022, w.e.f. 01.04.2022 does not, in any manner, dilute the settled legal principle that disallowance under that section must be restricted to the actual exempt (dividend) income for the following reasons: a. The amendments are prospective in nature inasmuch as the same have been made w.e.f. 01.04.2022 and are, therefore, applicable from assessment year 2022-23 and onwards. 7 ITA No. 7552 & CO. 27/Del./2018 a. Strictly without prejudice to (a) above, even assuming that the amendments are applicable retrospectively, still disallowance under section 14A of the Act cannot exceed the actual exempt dividend income. 2. Each of the aforesaid contentions are elaborated hereunder: Re (a): Amendment in section 14A - prospective and not retrospective 3. Kind attention is, at the outset, invited to the provisions of section 14A of the Act, as amended by the Finance Act, 2022, w.e.f. 01.04.2022: "14A. Expenditure incurred in relation to income not includible in total income. (1) Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which dos not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund 8 ITA No. 7552 & CO. 27/Del./2018 already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 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”. (Emphasis supplied) Note# Italicized portion inserted by Finance Act, 2022, w.e.f. 1.04.2022 4. On perusal of the aforesaid, it will kindly be appreciated that the following two amendments have been made in section 14A by the Finance Act, 2022, w.e.f. 01.04.2022: a. The words, “Notwithstanding anything to the contrary contained in this Act, for the purposes of, has been inserted in sub- section (1); and b. New Explanation has been inserted after proviso below sub- section (3). 5. Kind attention is invited to the following relevant provisions of the Finance Bill/ Act, 2022 and the Memorandum explaining the provisions in the Finance Bill, 20.22, which clearly demonstrate, without any doubt whatsoever, that the aforesaid amendments have specifically been made from 01.04.2022 and are applicable from assessment year 2022-23 and onwards: a. Section 2(a) of the Finance Act, 2022 clearly provides that sections 2 to 84 shall, save as-othefwise provided, come into force on the lstday of April, 2022. Therefore, all sections of the 9 ITA No. 7552 & CO. 27/Del./2018 Finance Act, 2022, unless otherwise provided, are categorically brought into force on 01.04.2022 (refer Page 86 of CLPB II); b. Amendments in section 14A were made by clause 9, which is, in terms of above section 2(a), came into force on 01.04.2022 (refer Page 87 of CLPB II); c. In the Memorandum explaining the provisions in the Finance Bill, 2022, in respect of aforesaid clause 9, it is clearly stated that the amendments in section 14A will take effect from 01.04.2022 and will apply to assessment year 2022-23 and subsequent assessment years. The relevant para 7 of the Memorandum is reproduced hereunder (refer Page 101 of CLPB II): “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. Clause 9.” (emphasis supplied) 6. From the aforesaid, it is patently clear that the amendments in section 14A are applicable in relation to the assessment year 2022-23 and subsequent assessment jjears and are not applicable for earlier assessment years, including assessment year 2014-15, the year under consideration in the present appeal. 7. The aforesaid contention is, it is submitted, further fortified by following amendments made by the Finance Act/ Bill, 2022, which have specifically been made applicable retrospectively from earlier assessment years as specified in the relevant sections: a. By virtue of clause 13, section 40 was amended to insert Explanation 3 specifically w.e.f. 01.04.2005. The relevant extracts of the Finance Bill are as follows (refer Page 88 of CLPB II): 10 ITA No. 7552 & CO. 27/Del./2018 “13. In relation 40 of the Income-tax Act, in clause (a), in sub-clause (ii), after Explanation 2, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April. 2005, namely:- ‘Explanation 3-For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term “tax ” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax ” (emphasis supplied) Memorandum explaining the aforesaid amendment in section 40 clearly provides that the said amendment will take effect retrospectively. The relevant para 10 is reproduced hereunder (refer Pages 94 to 99 of CLPB II): “10. This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years b. Similarly, amendment in section 80CCD has been made applicable retrospectively from 01.04.2020 as is evident from the following: (Refer Page 89 of CLPB II) “20. In section 80CCD of the Income-tax Act, in sub-section (2), for the words “Central Government” wherever they occur, the words “Central Government or the State Government ” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2020”. Memorandum explaining the aforesaid amendment in section 80CCD clearly provides that the said amendment will take effect retrospectively. The relevant part of the memorandum is reproduced hereunder: “Incentives to National Pension System (NFS) subscribers for state government employees 11 ITA No. 7552 & CO. 27/Del./2018 3. This amendment will take effect retrospectively from 1st April, 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years; so as to ensure no additional tax liability arises on any contribution made in excess of 10% during such time.” c. By way of clause 10, sub-clause (c) has been inserted in clause (ii) of first proviso to section 17(2) with retrospective effect from 01.04.2020; d. Sub-section (1 A) of section 35 has been amended, vide clause 11 of the Bill, specifically with retrospective effect from 01.04.2021; e. In the Memorandum, it is stated that explanation inserted in section 50 of the Act is deemed to have been introduced retrospectively, i.e., from 1st day of April, 2021 (clause 15). 8. On a conjoint perusal of the aforesaid, it leaves no scope for any doubt, whatsoever, that the amendments in section 14A of the Act take effect prospectively and are applicable from assessment year 2022-23 and subsequent years. 9. In fact, wherever the Legislature wanted any amendment(s) to be made applicable retrospectively, the Legislature consciously and categorically provided so in the Finance Bill/ Act, 2022 as well as clarified in the Memorandum explaining the provisions in the Finance Bill, as are the instances cited above (like amendment in section 40), wherein, it is categorically stated that the said amendment is applicable retrospectively from assessment year 2005-06 and onwards. 10. That apart, it is further respectfully submitted that the very nature of amendment in section 14A of the Act, being substantive in nature, also makes it patently clear that the amendment(s) is applicable prospectively from assessment year 2022-23 onwards, as it would be evident from the following: a. Sub-section (1) introduces the new non-obstante clause, which is clearly substantive in nature, inasmuch as the said clause provides 12 ITA No. 7552 & CO. 27/Del./2018 that the provisions of section 14A shall be applicable irrespective of anything to the contrary contained in the entire Act. Similarly, newly inserted Explanation also introduces a non-obstante clause, overriding anything to the contrary contained in the Act, being substantive in nature. The aforesaid newly inserted non-obstante clauses are, it is submitted, clearly substantive in nature inasmuch as it overrides other substantive provisions of the Act and gives primacy/ supremacy to section 14A over the other statutory provisions of the Act. The amendment cannot, therefore, by any stretch of argument, be regarded as merely clarificatory/procedural in nature. b. Further, Explanation creates a deeming fiction of computing disallowance under section 14A on certain assumptions/ presumptions laid down by the fiction. Clearly, the aforesaid deeming fiction cannot be regarded as merely clarificatory in nature, since prior to the amendment, there was no mandate to compute disallowance on basis of any such newly inserted legal fiction(s). Moreover, the Explanation may, in certain case, result in enhancement of the quantum of disallowance under section 14A of the Act vis-a-vis the position existing prior to the amendment and hence, for this reason, too, the amendment is not merely clarificatory but substantive in nature [refer Supreme Court in Godrej & Boyce and in Essar Teleholdings (infra)] 11. Reliance in this regard, is placed to the following decisions wherein the Courts, have in the context of similar dispute regarding application of Rule 8D of the Income-tax Rules, 1962, (in short “the Rules”), which lays down the machinery for computing the disallowance under section 14A of the Act, held that the said rule, being a substantive one, cannot be regarded as merely clarificatory and the same has been held to be applicable prospectively: • Godrej and Boyce Manufacturing Co. Ltd vs. DOT: 394 ITR 449 (SC); 13 ITA No. 7552 & CO. 27/Del./2018 • Maxopp Investment Ltd vs. CIT: 402 ITR 640 (SC) 12. Specific reliance is placed on the following observations of the Hon’ble Supreme Court in the case of CIT vs. Essar Teleholdings Ltd. (2018) 401 ITR 445 (SC), wherein the SupremeCourt, while holding Rule 8D of the rules to be prospective in nature, observed as under: (Refer Pages 134 -161 @ 144,147,154,155 of CLPB II): “This court in the above case held that rule IBB shall be applicable even prior to the enforcement of the rule holding that the said rule merely provides a choice amongst well- known and well-settled modes of valuation. It was held that even in the absence of rule IBB, it would not have been objectionable to adopt the mode of valuation embodied in rule IBB, namely, the mode of capitalization of income on a number of years purchased value. The said judgment is, clearly, distinguishable in the context of issue which has arisen before us. In the present case, the methodology as provided under rule 8D was neither a well-known nor well-settled mode of computation. The new mode of computation was brought in place by rule 8D. No Assessing Officer. even in his imagination could have applied the methodology. which was brought in place by rule 8D. Thus. retrospective operation of rule 8D cannot be accepted on the strength of law laid down by this court in the above case”, [emphasis supplied) 13. In coming to the aforesaid conclusion, their Lordships relied upon the decision of the Constitution Bench of the Hon’ble Supreme Court in the case of CIT vs. Vatika Township Private Limited (2014) 367 ITR 466 (SC), wherein, the Court held that legislations which modify accrued rights or which imposed obligations or imposed new duties or attached a new disability have to be treated as prospective, unless the legislative intent is clearly to give the enactment retrospective effect. 14. Applying the aforesaid settled legal position and drawing analogy there from, it is respectfully reiterated that in the present case, the amendments in section 14A by the Finance Act, 14 ITA No. 7552 & CO. 27/Del./2018 2022, w.e.f. 01.04.2022 are, as stated above, substantive in nature. In such circumstances, the said substantive provisions must, in any case, necessarily be regarded as applicable prospectively, more so, having regard to the fact that the Finance Act/ Bill, 2022 and the Memorandum explaining the provisions of the Finance Bill, 2022 clearly states that the amendment(s) is applicable in relation to assessment year 2022- 23 and subsequent assessment years. 15. Further reliance is placed on the settled legal position that law as on 1st April of any financial year applies to the assessment of that year. Reference in this regard may be made to the following decisions: •The Supreme Court in the case of Reliance Jute and Industries Ltd. vs. CIT (1979) 120 ITR 921 (SC), following its earlier decisions in CIT vs. Isthmian Steamship Lings (1951) 20 ITR 572 (SC) and Karimtharuvi Tea Estate Ltd. vs. State of Kerala (1966) 60 ITR 262 (SC) clearly held as under [refer pages 172-175 of CLPB II]: “The assessee claims a vested right under s.24(2)(iii), as it stood before its amendment in 1957, to have the unabsorbed loss of1950-51 carried forwardfromyear to year until the loss is completely absorbed. The claim is based on a misconception of the fundamental basis underlying every income-tax assessment. It is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication: CIT vs. Isthmian Steamship Lines [1951] 120 ITR 572 (SC) and Karimtharuvi Tea Estate Ltd. vs. State of Kerala !1966160 ITR 262 (SC). On that principle, it is abundantly clear that when an assessment for the assessment year 1960-61 is to be made and s. 24(2) is invoked, it is s. 24(2) as in force in that assessment year 15 ITA No. 7552 & CO. 27/Del./2018 which has to be applied. That is the provision as amended by the Finance (No. 2) Act, 1957. There is no question of the assessee possessins am vested right under the law as it stood before the amendment. The assessment for one assessment year cannot, in the absence of a contrary provision, be affected by the law in force in another assessment year. A right claimed by an assessee under the law in force in a particular assessment year is ordinarily available only in relation to a proceeding pertaining to that year. Therefore, inasmuch as the provisions of s. 24(2), as amended in 1957, govern the assessment for the assessment year 1960-61, the High Court is right in affirming that the unabsorbed loss of Rs. 15,50,189 of the assessment year 1950-51 cannot be carried forward for more than eight years and consequently, cannot be set off against the business income of the assessment year 1960- 61 ”. (emphasis supplied) • Following the aforesaid decisions, the Bombay High Court in the case of CIT vs. Mirza Ataullah Baig (1993) 202 ITR 291 (Bom) similarly held as under [refer pages 176-182 of CLPB II], “As regards the second question, it may be observed that the law is well-settled that the Income-tax Act, 1961, as it stands amended on the 1st day of April of any financial year, applies to the assessment of that year. Any amendment in the Act or the rules which come into force after the 1st day of April of a financial year would not apply to the assessment of that year, even if the assessment is actually made after the amendments come into force (see Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966J 60 ITR 262 (SO). In the instant case, the assessment year is 1980-81. So, the law as it stood on the 1 st day of April, 1980, will apply to the assessment for the assessment year 1980-81. The rate of depreciation according to the law as it stood on that date was 30 per cent. By amendment made in the relevant rules by the Income-tax (Fifth Amendment} Rules, 1980, the rate of depreciation was raised to 40 per cent. This 16 ITA No. 7552 & CO. 27/Del./2018 amendment was made by Notification No. S.O. 562(E), dated July 24, 1980 (see [1980] 126 ITR (St.) 1). It was brought into force at once, i.e., on and from July 24, 1980. That being so, this amendment cannot apply to the assessment year 1980-81. The assessment for this year will be governed by the law as it stood on the 1st day of April, 1980. The rate of depreciation allowable under the law prevailing on 1st April, 1980, was 30 per cent. So that rate will apply”, (emphasis supplied) 16. In view of the aforesaid, it is emphatically submitted that the amendments in section 14A of the Act by the Finance Act, 2022, w.e.f. 01.04.2022 are applicable prospectively in relation to assessment year 2022-23 and subsequent assessment years. As a necessary corollary, the amended provisions are not applicable to assessment year 2014-15, the year under consideration in the present appeal. 17. In view of the aforesaid and for the reasons elaborately set out in the chart of issues, it is emphatically submitted that the disallowance under section 14A of the Act must be directed to be restricted to exempt (dividend) income aggregating to Rs.45,06,37,556 received in the year under consideration. Re (b): Even assuming amendment to be retrospective – disallowance still to be restricted to dividend income 18. Strictly without prejudice to (a) above and in the alternative, it is respectfully submitted that even assuming, without admitting, that the amendments in section 14A are held to be retrospective in nature and are therefore held to be applicable to assessment year 2014-15, i.e., the year under consideration, still the disallowance under that section cannot, in our respectful submission exceed the exempt income of Rs.45,06,37,556, for the reasons elaborated hereunder: 19. It is respectfully submitted that the statutory mandate of section 14A(1) of the Act is to disallow expenditure incurred in relation to “income which does not form part of the total income” under the Act. The emphasis is, therefore, on the quoted 17 ITA No. 7552 & CO. 27/Del./2018 expression in the substantive provisions of section 14A of the Act, which clearly mandates that the disallowance must be restricted to expenditure incurred in relation to specific/ actual/ real income which does not form part of the total income. . 20. The expression “does not form part of total income”, in our respectful submission, refers to actual/ real income for the relevant assessment year in which the applicability of the provisions of section 14A of the Act are being tested/ applied. The said expression, more particularly the expression “does not”, it is submitted, refers to the actual/ real income for the relevant assessment year and not to any futuristic/ unreal/ speculative amount which may or may not be received at any future date. 21. Kind attention in this regard is invited to the dictionary meaning of the expression ‘does’ as given in various dictionaries: As per Collins Cobuild Student’s Dictionary - ‘does’ is the third person singular of the present tense of do. - ‘Doesn’t’ is the usual spoken form of ‘does not ’ In Oxford Dictionary the word ‘does’ is defined as under: “do " Verb (does past did, past part done) 1 perform or carry out (an action). 2 achieve or complete (a specified target) 3 act or progress in a specified way 4 work on (something) to bring it to a required state 5 have a specified result or effect on the walk will do me good. 6 work at for a living or take as one’s subject of study what does she do. 7 make or provide 8 be suitable or acceptable he ’11 do 9 (be/have done with) give up concern for, have finished with informal regularly take (a narcotic drug). ‘does ’ Third person singular present of Do ’ 18 ITA No. 7552 & CO. 27/Del./2018 22. On perusal of the aforesaid dictionary meaning of the word ‘does’, it will be kindly appreciated that the word ‘does’ refers to third person singular of the present tense of ‘do’, which means the act done in present. The word ‘does’, it is emphatically submitted, refers to an act of the present and not the future. In the context in which the word ‘does’ finds place in section 14A(1)of the Act, it is respectfully submitted that the same refers to the determination of the factum of receipt of exempt income in the relevant previous year. 23. In simple words, for section 14A of the Act there must be income actually earned in the first place and such income does not form part of ‘total income’, which is defined under section accrued (or deemed to be accrued) or arising, during the relevant previous year. As a necessary corollary, the aforesaid quoted expression refers to earning of exempt income during the relevant previous year. 24. It is emphatically submitted that construing the aforesaid expression “does not form part of total income”, the Courts have held that the said expression connotes/ refers to the real/ actual income for the relevant assessment year and therefore, only expenditure incurred in relation to actual exempt income for the relevant assessment year can be subject matter of disallowance under section 14A of the Act. As a necessary corollary, the Courts have held that the disallowance under section 14A must be computed only with reference to the dividend yielding investments and must, in any case, be restricted to the exempt income (refer judicial precedents referred on page 9-10 of chart of issues). 25. Specific reliance in this regard is placed on the following decisions: • The Delhi High Court in the case of CIT vs. Holcim India Pvt. Ltd.(2014) 272 CTR 282 (Del) held that the disallowance under section 14A of the Act cannot be made in the absence of any exempt income. In coming to the said 19 ITA No. 7552 & CO. 27/Del./2018 conclusion, the Hon’ble Court observed as under [refer pages 56-62 of CLPB II]: “13. We are confused about the stand taken by the appellant-Revenue. Thus, we had asked senior standing counsel for the Revenue, to state in his own words, their stand before us. During the course of hearing, the submission raised was that the shares would have yielded dividend, which would be exempt income and therefore. the CIT (A) had invoked s. 14A to disallow the entire expenditure. The aforesaid submission does not find any specific and clear narration in the reasons or the grounds given by the CIT (A) to make the said addition. Possibly, the CIT (A), though it is not argued before us, had taken the stand that the respondent-assessee had made investment and expenditure was incurred to protect those investments and this expenditure cannot be allowed under s. 14A. 14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, vet s. 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab & Haryana High Court in CIT vs. Lakhani Marketing Inch (IT Appeal No. 970 of2008, decided on 2nd April, 2014) [reported at (2014) 272 CTR (P&H) 265: (2014) 111 DTR (P&H) 149— Ed.], made reference to two earlier decisions of the same Court in CIT vs. Hero Cycles Ltd. (2010) 233 CTR (P&H) 74: (2010) 31 DTR (P&H) 301: (2010) 323 ITR 518(P&H) and CITvs. Winsome Textile Industries Ltd. (2009) 319 ITR 204(P&H) to hold that s. 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in CIT vs. Corrtech Energy (P) Ltd. (2014) 272 CTR (Guj) 20 ITA No. 7552 & CO. 27/Del./2018 262: (2014) 111 DTR (Guj) 146: (2014) 223 Taxman 130 (Guj). The third decision is of the Allahabad High Court in IT Appeal No. 88 of 2014, CIT vs. Shivam Motors (P) Ltd. decided on 5th May, 2014 [reported at (2014) 272 CTR (All) 277: (2014) 111 DTR (All) 153— Ed.]. In the said decision it has been held: "As regards the second question, s. 14A of the Act provides that for the purposes of computing the total income under the chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question„ the finding of fact is that the assessee had not earned am tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT (A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752 made by the AO was in order". 15. Income exempt under s. 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, max depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment 21 ITA No. 7552 & CO. 27/Del./2018 company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc., cannot be ruled out is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax. 16. What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT (A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the AO and has also not been doubted by the CIT (A)”, (emphasis supplied) • The Delhi High Court in the case of Pr. CIT vs. IL&FS Energy Development Co. Ltd. (2017) 297 CTR 452 (Del) held that income under section 5 of the Act refers to “real income and not to any notional or speculative amount”. The Court held that in view of the provisions of section 14A read with the formula given in Rule 81) of the Rules, disallowance has to be computed with reference to the exempt income earned in the relevant assessment year, more particularly, having regard to the concept of real income. The relevant observations of the Court are reproduced as under [refer pages 63-69 @ 66 of CLPB II]: 22 ITA No. 7552 & CO. 27/Del./2018 “13. In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later assessment years. 14. In the Explanatory Memorandum to the Finance Act 2001, by which s. 14A was inserted w.e.f. 1st April, 1962, it was clarified that "expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income". The object behind s. 14A was to provide that "no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the IT Act". 15. What is taxable under s. 5 of the Act is the "total income " which is neither notional nor sveculative. It has to be 'real income’. The subsequent amendment to s. 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the assessment year in question from investments made. not in that assessment year, but earlier assessment years. 16. Rule 8D(1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under : "8D(1) Where the AO, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b)the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in 23 ITA No. 7552 & CO. 27/Del./2018 relation to such income in accordance with the provisions of sub-r. (2)." 17. The words "in relation to income which does not form part of the total income under the Act for such previous year" in the above r. 8D(1) indicates a correlation between the exempt income earned in the assessment year and the expenditure incurred to earn it. In other words, the expenditure as claimed by the assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the assessment year in question. the question of disallowance of the expenditure incurred to earn exempt income in terms of s. 14A r/w r. 8D would not arise. 18.The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to r. 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to r. 8D as well as the title to s. 14A. The circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered. 19.In the considered view of the Court, this will be a truncated reading of s. 14A and r. 8D particularly when r. 8D (1) uses the expression 'such previous year’. Further, it does not account for the concept of 'real income'. It does not note that under s. 5 of the Act. the question of taxation of 'notional income' does not arise. As explained in CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010)233 CTR (SC) 42: (2010) 41 DTR (SC) 233 : (2010)326 ITR 1 (SC), the mandate of s. 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives byway of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT Dt. 11th Feb., 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration. 24 ITA No. 7552 & CO. 27/Del./2018 26. The fundamental principles governing the applicability of section 14A of the Act may, thus, be culled out from the aforesaid decisions as under: a. The expression “income” in section 14A refers to “real income” earned during the relevant assessment year and mot to any notional/ speculative/ futuristic amount; b. The expression “does not form part of total income” refers to real income for the relevant assessment year - since the expenditure has to be disallowed in relation to “such income”, which means the real income for the relevant assessment year, the disallowance cannot exceed the exempt income; c. Rule 8D of the rules clearly and categorically requires disallowance to be computed of the expenditure incurred in relation to income which does not form part of total income “for such previous years” and therefore, the correlation has to be between the actual exempt income for the year and the expenditure incurred in relation to such actual exempt income. 27. It is utmost important to note that the substantive expression “expenditure incurred in relation to income which does not form part of total income”, has not undergone any change/ amendment. 28. What is therefore sought to be emphasised is that the afore-quoted expression, which has been construed by the Courts to mean that the expenditure incurred in relation to actual/ real income is to be disallowed, has not been amended and therefore, even after the amendment, there is no change in the legal position as existed prior to the amendment by the Finance Act, 2022. 29. It is quite elementary and well-settled that the Legislature is presumed to be aware of the judicial interpretation of any particular provision/ statute and therefore, if the Legislature, in its wisdom, still decides not to make any amendment, the presumption is that the judicial interpretation stands accepted 25 ITA No. 7552 & CO. 27/Del./2018 by the Legislature [refer Municipal Corporation of Delhi vs. Shiv Shanker: (1971) 1 SCC 442 (SC); Greater Bombay Coop. Bank Ltd vs. United Yarn Tex (P) Ltd: (2007) 6 SCC 236 (SC); Shree Bhagwati Steel Rolling Mills vs. CCE: (2016) 3 SCC 643 (SC); Bangalore Club vs. CWT: (2020) 9 SCC 599 (SC); Mohd. Arshad vs. M/s. Naimuddin Nasimuddin and Anr: (1989) SCC OnLine Pat 283 (Pat.); Most. Najum Bibi vs. Jamila Khatoon: (1990) 187 ITR 548 (Pat.)]. 30. For the sake of emphasis, it is respectfully submitted that in the absence of any substantive amendment in section 14A(1) of the Act, more particularly the expression “income which does not form part of total income” which has been interpreted by the Courts to mean that the disallowance must be restricted to actual/ real income earned during the relevant year, the corollary is that judicial interpretation stands accepted and there is, even otherwise, no legislative intent to dilute the principle so laid down in various judicial precedents. 31. Even otherwise, it is further respectfully submitted that on deeper analysis of the relevant provisions of the newly inserted Explanation, it will kindly be appreciated that following are the pre-requisites for its application: a. Explanation applies only “in a case where the income, not forming part of the total income” under the Act has not accrued or arisen or has not been received during the relevant year. Therefore, there must first be “income”, which has not been included in the total income either on account of it not having accrued/ arise and/ or not having been received. But what is important is there must be income, in the first place. In the absence of any real income, the Explanation, in our respectful submission cannot be applied. b. The Explanation applies once there is definite income, which may not be includable in total income of the relevant year, may be on account of it not having accrued or arisen or not having been received. 26 ITA No. 7552 & CO. 27/Del./2018 To emphasize, it is respectfully submitted that there must, for application of Explanation, be definite “income” in the first place. 32. The aforesaid may be explained with the help of the following examples: a. In case of tax-free interest-bearing bonds, interest income may accrue or/ arise and may be received at a future date, may be at the time of its redemption. In above example, provisions of section 14A would apply to such bonds, because there is definiteness of income (i.e., income by applying the rate of interest is known). The said definite income is not included in the total income of the relevant year only on account of the fact that the same will accrue/ arise and shall be received at a later date. b. Another example could be exempt income (like fixed rate of return) receivable on any security like bank FD in NRE account) - In that case also, the quantum of interest income is definite/ known, which may accrue/arise and/ or may be received at a future date. In the aforesaid examples, merely because (interest) income, though known, is not included in the income of the relevant year, one may not be able to contend that section 14A is not applicable. Now, in view of the newly inserted Explanation, section 14A of the Act shall still be applicable, even though such known income is not relatable to the relevant assessment year. 33. In case of shares, it will, however, kindly be appreciated that there is complete uncertainty as to whether or not any amount/ income (be it dividend or capital gains) arise at all at a later date or not, and if at all the same shall arise, whether or not the same shall be exempt from tax or not. As has judicially been recognized by the Delhi High Court in the case of Holcim (supra), a shareholder has no control over any amount being 27 ITA No. 7552 & CO. 27/Del./2018 received as dividend and cannot, in fact, insist on payment of any dividend. 34. Therefore, merely by holding shares, it cannot be inferred that there is any amount not taxable in future - there is, in fact, complete uncertainty, much less definiteness, to the amount of income/ dividend, if at all, receivable at any time in future. 35. Just to elaborate, the receipt of dividend and it being exempt in future is subject to multiple improbable(s), some of which (only indicative/ illustrative list and not exhaustive) are highlighted as under: a. Profit making company may or may not decide to distribute its profit by way of dividend and may, in fact, at a later stage suffer huge losses which may completely wipe-out the profits and may therefore, render the company totally incapable of distributing any amount as dividend; b. Loss-making company, which has no capability (both legally as well as practically) to distribute any amount of dividend, and therefore, it would be totally absurd to consider investment in that company for the purpose of disallowance under section 14A; c. Dividend may be exempt in the relevant year but may be taxable at a future date and therefore, on the assumed/ probable dividend, the provisions of section 14A cannot be applied. This is further fortified by the fact that dividend, as a matter of fact, has now become liable to tax from assessment year 2021-22 and onwards; d. Receipt of dividend is also dependent upon whether or not the shareholder actually hold the shares on the record date on which dividend is declared/ distributed by the investee company. 36.The aforesaid are some of the illustrative cases, merely to demonstrate complete hypothesis/ fallacy in assuming that 28 ITA No. 7552 & CO. 27/Del./2018 merely because the investor is holding shares in a company, there is likelihood of some dividend being received in future and such dividend being not subjected to tax so as to make any disallowance in an earlier year of the so- called expenditure incurred in relation to such assumed dividend under section 14A of the Act. 37. Having regard to the aforesaid, it is respectfully submitted that looked at from whatever angle, the legal position even after the amendment is that the provisions of section 14A of the Act cannot be applied in a situation where there is no definite income in the relevant year. 38. For the aforesaid cumulative reasons, it is respectfully submitted that even after the amendment and insertion of Explanation in section 14A of the Act, the fundamental principle, more particularly in case of shares, that disallowance cannot exceed the exempt income, has not been diluted and/or undergone any change and continues to hold the field. 39. Being so it is respectfully submitted that the disallowance under section 14 A of the Act, even post-amendment cannot exceed the exempt dividend income actually earned in the relevant year. Summary/ Conclusion 40. In view of the aforesaid legal position, it is respectfully submitted that the amendments made to section 14A vide Finance Act, 2022 are prospective in nature i.e., are applicable from assessment year 2022-23 onwards and are not applicable to the present assessment year 2014-15. 41. Alternatively and strictly without prejudice to the aforesaid, the legal position that disallowance under Section 14A cannot exceed the quantum of dividend (exempt) income earned during the year under consideration, in our respectful submission, still holds the field despite insertion of Explanation below proviso to 29 ITA No. 7552 & CO. 27/Del./2018 sub-section (3) of section 14Aof the Act. Therefore, for this reason, too the disallowance under Section 14A of the Act must be directed to be restricted to exempt income.” 10. In reply, learned counsel appearing for the assessee submitted, the amendment to section 14A of the Act by Finance Act, 2022 would not have retrospective operation and will apply prospectively from assessment year 2022-23. In support of such contention, he relied upon the following decision: i) PCIT vs. M/s. Era Infrastructure (India) Ltd. – ITA No. 204/2022 – judgment dated 20 th July 2022 (Del.); & ii) ACIT vs. M/s. Hindustan EPC Co. Ltd. – ITA No.1421/Del/2019 dated 29.07.2022; 11. We have considered rival submissions in the light of decision relied upon and perused material on record. In so far as the factual aspect of the issue is concerned, there is no dispute that the assessee, in the year under consideration, has earned exempt income by way of dividend amounting to Rs.45,06,37,566. 12. Undisputedly, assessee has disallowed suo motu an amount of Rs.193,75,05,498 under Section 14A of the Act, being expenditure 30 ITA No. 7552 & CO. 27/Del./2018 attributable to the earning of the exempt income. Of course, the assessing officer made further disallowance of Rs.28,63,13,621. 13. The primary and main contention of assessee before us is, disallowance of expenditure under Section 14A cannot exceed the exempt income earned during the year. The assessee has submitted, even if, assessee mistakenly might have disallowed expenditure more than the quantum of the exempt income earned during the year, however, such mistake committed cannot be held against the assessee ignoring legal principles laid down on the issue. We must observe, in case of Joint Investment (Pvt.) Ltd. vs. CIT (supra), Hon'ble jurisdictional High Court has categorically held that disallowance of expenditure under Section 14A of the Act cannot exceed the quantum of exempt income earned during the year. In fact, learned Commissioner (Appeals), in principle, has accepted aforesaid legal proposition. However, only because the assessee itself has disallowed certain amount exceeding exempt income, learned Commissioner (Appeals) has restricted the disallowance to that amount. This, in our view, is improper. If due to ignorance of legal position or by mistake certain disallowance, which is either not to be made or is more than 31 ITA No. 7552 & CO. 27/Del./2018 the quantum of disallowance to be actually made, such mistake or ignorance committed by the assessee cannot be held against him and to his disadvantage. This is so, because, there is no estoppel against law. The same principle applies to the assessee, as well, in case of any wrong claim of deduction or exemption which is contrary to the statutory provision. Thus, keeping in view the ratio laid down by the Hon'ble jurisdictional High Court in case of Joint Investment (Pvt.) Ltd. vs. CIT (supra), we hold that the disallowance under Section 14A of the Act should be restricted to the exempt income earned by the assessee during the year under consideration. 14. Having held so, it is necessary to deal with the submissions of learned Departmental Representative regarding retrospective application of amendment made to section 14A by Finance Act, 2022 w.e.f. 01.04.2022. In case of PCIT vs. Era Infrastructure India Ltd. (supra), the Hon'ble jurisdictional High Court very clearly and categorically has held that such amendment will apply prospectively from assessment year 2022-23. Following the aforesaid decision of the Hon'ble jurisdiction High Court , the co-ordinate Bench in case of ACIT vs. Hindustan EPC Ltd. (supra) has expressed identical view. 32 ITA No. 7552 & CO. 27/Del./2018 15. In view of the aforesaid, we are unable to accept the contention of learned Departmental Representative regarding retrospective application of the amendment made to section 14A of the Act. Thus, the assessing officer is directed to restrict the disallowance under Section 14A of the Act to the amount of exempt income earned by the assessee during the year under consideration. 16. In the result, revenue’s appeal is dismissed and cross-objection filed by the assessee is allowed as indicated above. Order pronounced in the open court on 29 th August, 2022. Sd/- Sd/- (PRADIP KUMAR KEDIA ) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 29 th August, 2022. Mohan Lal Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi 33 ITA No. 7552 & CO. 27/Del./2018 Sl. No. Particulars Date 1. Date of dictation (Order drafted through Dragon software): 11.08.2022 2. Date on which the draft of order is placed before the Dictating Member: 17.08.2022 3. Date on which the draft of order is placed before the other Member: 4. Date on which the approved draft of order comes to the Sr. PS/PS: 18.08.2022 5. Date of which the fair order is placed before the Dictating Member for pronouncement: 22.08.2022 6. Date on which the final order received after having been singed/pronounced by the Members: 29.08.2022 7. Date on which the final order is uploaded on the website of ITAT: 30 .08.2022 8. Date on which the file goes to the Bench Clerk 30.08.2022 9. Date on which files goes to the Head Clerk: 10. Date on which file goes to the Assistant Registrar for signature on the order: 11. Date of dispatch of order: