Assistant Commissioner of Income Tax, Circle-3, Guwahati V. Williamson Financial Services Limited, Kolkata

ITA 156/GTY/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9928 (ITAT-GUWAHATI)
• Duration Of Justice: 3 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-07-2022
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: misc
• Appeal Filed On: 10-04-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business expenditure; Earning of tax free income; Deemed to accrue or arise in india; Retrospective amendment; Capital expenditure; Rule 8D; Set aside; Capital Gains; CHAPTER IV
• Section: 147; 27; 37; 271(1)(c); 15; 43B; 5(2); 14A; 37(1); 205; 192; 113; 43; 119; 22

Judgement Text

I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 1 IN THE INCOME TAX APPELLATE TRIBUNAL “GUWAHATI BENCH, GAUHATI VIRTUAL HEARING AT KOLKATA Before Shri Sanjay Garg, Judicial Member and Shri Manish Borad, Accountant Member I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 ACIT, Circle-3, Guwahati...................................................................... Appellant vs. Williamson Financial Services Limited............................................. Respondent House No.147, 5 th Bye Lane, R G Baruah Road, Ganeshguri-781005 [PAN:AAACW4504A] I.T.A. No.159/Gau/2019 Assessment Year: 2009-10 ACIT, Circle-3, Guwahati...................................................................... Appellant vs. Williamson Financial Services Limited............................................. Respondent House No.147, 5 th Bye Lane, R G Baruah Road, Ganeshguri-781005 [PAN:AAACW4504A] Appearances by: Shri Narendra Singh Saini, Advocate, appeared on behalf of the appellant. Shree N. T Sherpa, JCIT-DR, appeared on behalf of the Respondent. Date of concluding the hearing : May 24, 2022 Date of pronouncing the order : July 6, 2022 ORDER Per Sanjay Garg, Judicial Member: The captioned appeals have been preferred by the revenue against the separate orders of the CIT(A) of the even date 31/01/2019 relating to different assessment years. Since the facts and issues involved in all the appeals are identical, hence, all the I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 2 captioned appeals were heard together and are being disposed of with this common order. Revenue’s appeal ITA No. 155/Guh/2019 for AY-2013-14 is taken as lead case for the purpose of narration of facts and issues involved. ITA No. 155/Guh/2019 The revenue in this appeal has taken following grounds: (i) That the Ld. CIT(A) is not justified in facts as well as in law in restricting the disallowance of Rs.10,62,10,110/- under Section 14A of the Income Tax Act, 1961 to the extent of income claimed exempt for the AY under consideration. (ii) The appellant craves leave to add, alter or amend any or all of the grounds of appeal before or during the course of appeal. 2. The brief facts of the case are that during the assessment proceedings, the Assessing Officer noticed that apart from other income the assessee during the year earned tax exempt dividend income of Rs.37080750/- arisen on the investments made by the assessee. However, the assessing officer noticed that the own funds of the assessee were not sufficient to meet the investments in question. Assessing officer, therefore, applied the provisions of section 14A read with rule 8D of the Income Tax Rules and computed the expenditure relatable to the aforesaid tax exempt dividend income at Rs.1 0621 0110. Since the assessee in its computation of income had suo moto disallowed an amount of Rs.2 254 8285 on account of expenditure relatable to the tax exempt dividend income earned by the assessee, the assessing officer, therefore, disallowed the balance amount of Rs.8 366 1625/- and added back the same into the income of the assessee and computed the taxable income of the assessee accordingly. Being aggrieved by the above order of the assessing officer, the assessee filed appeal before the CIT(A). The learned CIT(A), however, while relying upon the decision of the hon’ble Delhi High Court in the case of PCIT versus Moderate Leasing and Capital services Private Limited 102 (2018) dated31/01/2018, held that the disallowance under section 14A cannot exceed the total tax exempt income earned I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 3 during the year. He accordingly restricted the disallowance to the extent of exempt income earned by the assessee. Being aggrieved by the above action of the CITA, the revenue has come in appeal before us. 3. We have heard the rival contentions and gone through the record. At the outset the learned departments representative (DR) has invited our attention to the newly inserted explanation to section 14 A to submit that now it has been clarified vide aforesaid explanation that notwithstanding anything to the contrary contained in the Act, the provisions of section 14A shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income has not accrued or arisen or has not been received during the year and the expenditure has been incurred during the year in relation to such income. The learned DR, referring to the above stated explantation, has submitted that since the same is classificatory in nature, therefore, the same will apply with retrospective effect. He therefore has submitted that the action of the CIT(A) in restricting the disallowance to the extent of exempt income earned by the assessee was not as per the mandate of the law. 4. The ld. DR in this respect has made the following submissions: “CBDT had issued Circular No. 5/2014 dated 11/02/2014, clarifying Rule 8D read with section 14A of the Income Tax Act which provided for disallowance of the expenditure even where the tax payer in a particular year had not earned any exempt income. However, still some Courts have taken the view that if there is no exempt income during the year, no disallowance u/s 14A of the Act can be made. Such an interpretation is not in line with the intent of the legislature. Such an interpretation defeats the legislative intent of section 14A of the Act. In order to make the intention of the legislation clear and to make it free from misinterpretation and to give effect to the CBDT's Circular No. S/2014 dated 11/02/2014, the Legislature has made two changes to section 14A through the Finance Act, 2022, which are as follows: a. Insertion of Non-obstante clause by way of substitution and, I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 4 b. Insertion of an Explanation to re-enforce by way of clarification the contents of the CBDT's Circular No.05/2014 dated 11/02/2014 a. Insertion of Non- obstante clause: The main objective to substitute a non-obstante clause in sub-section 1 appended to section 14A which reads as follows "Notwithstanding anything to the contrary contained in this Act, for the purpose of is to overcome the observations made by the Hon'ble Madras High Court in Redington (India) Ltd v. Addl.CIT, (2017) 392 ITR 633, 640 (Mad), wherein it was observed that an assessment in terms of the Act is specific to an assessment year and related previous year as per section 4 read with section 5 of the Act. And if any contrary intention would have been there it would have been expressly stated therein (section 14A) therefore, the language of section 14A should be read in that context such that it advances the scheme of the Act rather than distort it. Thus this judicial observation interpreted that section 14A would apply only where exempt income was earned in the relevant previous year and would not be applied to notional/anticipated exempted income that is not earned in the previous year and thus had made the Circular No.05/2014 dated 11/02/2014 infructuous. b. Insertion of an Explanation: The explanation inserted is as follows: "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." In the Explanation, there also exists a non-obstante clause to overcome the past judicial observations and it has been clarified that the intention of the legislature that it shall always be deemed under section 14A to have disallowed deductions against expenditure incurred to earn an exempted income irrespective of the fact whether or not it was earned in the same financial year. Further, in general parlance whenever a clarification amendment with the use of words such as for the removal of doubts", and "shall be deemed always to have meant" etc are made, they are to have a retrospective effect even if they are made effective prospectively. Hence from the above it is clear that the Circular No 5/2014 dated 11/02/2014 is still being in force and for invoking disallowance under section 14A of the Act, it is not material that the assessee should have earned such exempt income during the financial year under consideration. Therefore the decision of the Ld. CIT(A) that the disallowance under section 14A read with Rule 8D cannot exceed the income claimed exempt appears to be perverse and it is humbly prayed before this Hon’ble Tribunal that it may be pleased to restore the order of the Assessing Officer.” I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 5 5. The ld. AR, on the other hand, has submitted that the Explanation brought to section 14A of the Income Tax Act vide Finance Act 2022 is prospective in nature and cannot be applied to the pending appeals. He has further submitted that the law settled prior to the exertion of the aforesaid Explanation that the disallowance of expenditure u/s 14A cannot exceed the tax exempt income earned by the assessee during the year. He, in this respect, has made the following written submissions: “The Finance Act, 2022 has brought in amendment into Section 14A of the Income-tax Act, 1961 (Act'). Section 14A of the Act was introduced in the year 2001 with retrospective effect from the year 1962 to state that no deduction shall be granted towards an expenditure incurred in relation to an income which does not form part of the Total Income. The method for identifying the expenditure incurred is prescribed under Rule 8D of the Income-tax Rules, 1962 (Rules). From its inception, the applicability of this provision has always been a subject matter of litigation and one such point that has been oft- debated is regarding the disallowance of expenditure in the absence of exempt income. In the year 2009, a Delhi Special Bench Tribunal in Cheminvest Ltd. v. CIT, 317 ITR 86 took a view that when an expenditure is incurred in relation to an exempt income, irrespective of the fact whether any exempt income was earned by the Assessee or not, disallowance should be grieved by the Assessee. To further this, a circular was issued by the CBDT in the year 2014 Circular No. 5/2014 dated February 11, 2014 reiterating the view of the Special Bench. However, even after the circular issued by CBDT, rulings still emerged that when there is no exempt income, then disallowance under Section 14A is unwarranted following a simple rule that when there is no exempt income, there is no necessity to disallow the expenditure. To name a few of them are CIT V. Corrtech Energy Pvt. Ltd., (2014) 223 taxmann 130 (Guj); CITv. Holcim India Pvt. Ltd., (2015) 57 taxmann.com 28 (Del).Marg Ltd v. CIT, (2020) 120 taxmann.com 84 (Madras). Further, it was held that the AO cannot reject the disallowances offered by the assessee, without adducing any reasons. A few of such decisions are PCIT V. Moonstar Securities Trading and Finance Co. P. Ltd. [2019] 105 taxmann.com 275 (SC); CIT v. Celebrity Fashion Ltd. [2020] 119 taxmann.com 426 (Mad); Marg Ltd. v. CIT [2020] 120 taxmann.com 84 (Mad). The Hon'ble Delhi High Court in the case of CIT Vs Moderate Leasing and Capital Services Pvt. Ltd in ITA 102/2018 order dated 31/01/2018 has held that disallowance u/s 14A should not exceed the exempt income itself. Against this judgment, the SLP filed by the Revenue was dismissed by the Hon'ble Supreme Court of India in the case I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 6 of Pr. CIT Vs Moderate Leasing and Capital Services Pvt. Ltd [Special Leave Petition (Civil) Diary No(s). 38584/2018 dated 19/11/2018]. Against this backdrop, the Finance Act, 2022 has inserted an explanation to Section 14A to clarify that bereft exempt income being earned in any year, the disallowance under Section 14A will still be attracted. The Act further proposes to apply the amendment retroactively thereby changing the positions laid down by the Courts taken in favour of the taxpayers to date. In light of this amendment, the following issues crop up: 1. Does the amendment cover only those scenarios where exempt income is NIL in a particular year? 2. In such a case, will the proposition laid down by the Courts that disallowance of expenditure should not exceed the quantum of exempted income still hold good? 3. Whether the requirement to record satisfaction by the AO as provided in the second limb to Section 14A of the Act is still required to be adhered to? Should disallowance be restricted to exempt income even after the amendment? Among many other issues that skulked in on the introduction of Section 14A, the issue pertaining to expenditure disallowance being higher than exempt income has been a point of litigation before various fora and decided in favour of the taxpayers holding that disallowance under Section 14A cannot exceed the exempt income earned. With this being the position, now a question may arise as to whether the proposed amendment will have its application only in a situation where exempt income is NIL. If the answer to this is in the affirmative, the next question would be whether the position laid down by the Courts as mentioned supra would continue to have authority? Going by the plain reading of the explanation inserted, it appears to the naked eye that disallowance would be suffered only in cases where exempt income is not at all accrued or incurred in a particular year. That being the case, it can be asserted that a position that disallowance of expenditure cannot exceed the quantum of exempt income would continue to apply dehors the amendment proposed. Can disallowance be litigated where no exempt income is received at all from an investment? Another issue that needs to be analysed is whether disallowance under Section 14A could still be made where no exempt income is received in any year against an investment that has the potential to provide an exempt income. Illustration: I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 7 Let us assume that an Assessee ‘X’ had made some investments in shares for which he is eligible to get dividend income. These incomes were earlier exempt in the hands of the X. However, X had not received any dividend for 3 consecutive years. As per the amendment made, X was subjected to Section 14A disallowance for the expenditure incurred. X then sells the shares and pays the necessary tax for the same. Can X now go to the authority and seek to nullify the disallowances made as no exempt income was received by him for any of the years where he suffered disallowance? The essential question is, is the mere potential to earn an exempt income sufficient to make a disallowance in cases where an assessee has not earned any exempt income during the period when an investment was held by him? It is the submission that one cannot predict exempt income to be received if not accrued at all in a year and that to comply with the amendment made, the department for the purpose of calculation, must draw up all the exempt income received over the years and carry out the disallowance under Section 14A restricting to that quantum of exempted income alone. Is recording of satisfaction still mandatory? Also, One may wonder if the legal positions laid by the Courts that an AO must first record his satisfaction as to the correctness of the claim of the Assessee in respect of expenditure incurred in relation to exempt income before invoking Rule 8D for disallowing expenses under Section 14A should still be adhered to or not after the amendment. It is the submission that this requirement of the AO to record his satisfaction will not be done away with by the amendment. Even on the application of the amendment, if the AO proposes to disallow the expenditure in a year in which no exempt income is earned by applying Rule 8D, he should still record his satisfaction with well-founded and cogent reasons as to why he thinks that an assessee has incurred any expenditure relating to exempt income. As per sub- section (2) of section 14A the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does 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. The AO should be in a position to pinpoint, with an acceptable degree of accuracy, that the expenditure which was incurred is related to the income which is not subject to tax. The Hon'ble ITAT Delhi Bench "E" (Third Member) in the case of Wimco Seedlings Ltd Vs. Deputy Commissioner of Income-tax (Asst.), Special Range, Moradabad reported in [2007] 107 ITD 267 (Delhi) (TM) has observed that only expenditure which has been proved to have been incurred in relation to the earning of tax-free income, can be disallowed and the section cannot be extended to disallow even expenditure which is assumed to have been I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 8 incurred for the purpose of earning the tax-free income. The word 'incurred’ refers to the factual spending of the expenditure in relation to the exempt income and does not refer to a deemed spending or assumed spending for the purpose. While applying the section there is no authority conferred by the section upon the Assessing Officer to deem or assume certain expenditures to have been incurred in relation to the tax-free income. Common expenditure incurred at the head office cannot be broken up artificially to attribute or apportion a part thereof to the earning or the tax-free income on the assumption that such part of the common expenditure was incurred in relation to the tax-free income. Not only the incurring of the expenditure but also its relationship to the exempted income must be clear and must be capable of being ascertained on the face of it without involving any further mental exercise. The burden would seem to be on the Assessing Officer to not only show that some expenditure was factually incurred but also to show its relationship with the income exempt from tax. In an indivisible business consisting partly of taxable activities and partly of tax- free activities, it is open to the Assessing Officer to identify expenditure, if any, incurred in relation to the earning of non-taxable income and disallow the same. But the section cannot be taken beyond that and every item of expenditure which has no apparent connection or nexus with the earning of the tax-free income cannot be in part be attributed on some yardstick, whatever may be the sanctity behind such yardstick, to the earning of the tax-free income. For such assumption or deeming, there is no authority given in the section as it stood for the year under appeal. An amendment by Finance Act 2006 introduced sub-sections (2) & (3) as follows: "(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does 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." It is by the above sub-sections which come into force from the assessment year 2007-08 onwards that authority is given to the Assessing Officer to determine, on the basis prescribed, the amount of expenditure incurred in relation to income which is exempt from income tax. Even here the Assessing Officer has to first record a finding that he is not satisfied with the correctness of the assessee’s claim regarding such expenditure. Sub-section (3) clinches the position by saying that the Assessing Officer can determine the amount of I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 9 expenditure incurred in relation to exempted income on the prescribed basis even where the assessee claims that no such expenditure was incurred by him as a matter of fact. Whether the provisions of Section 14A will have a retroactive application? Another possible issue that can arise is the retroactive application of the provision. Though the Act says that the amendment is going to be made effective from AY 2022-23 only, the explanation inserted portrays a different understanding. Generally, when an amendment is brought into a statute, it is considered to be prospective unless stated otherwise expressly. The amendment proposed in the section is worded as under: ‘Section 14A 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 financial year and the expenditure has been incurred in relation to such exempt income.’ The provision proposed seems to apply to past transactions as well. It is an accepted and known principle of law that an amendment cannot operate retrospectively if it would saddle liability on an Assessee in the absence of any legal requirement existing at that point in time. As the amendment proposed seeks to tax the Assessees for the past years as well where disallowance had not been made, it would mean that the amendment is contrary to the well- settled position of law. The Hon'ble ITAT Bangalore Bench "B" in the case of Sivan Securities Pvt. Ltd Vs The Deputy Commissioner of Income-tax in ITA No. 708/Bang/2021- in the assessment Year 2018-19 Date of Order 07.02.2022 has held that the further question is whether the amendment to section 36(1)(Va) and 43B of the I.T. Act by Finance Act, 2021 is clarificatory and declaratory in nature. The Hon'ble Supreme Court in the recent judgment in the case of M. M. Aqua Technologies Limited v. CIT reported in (2021) 436 ITR 582 (SC) had held that retrospective provision in a taxing Act which is "for the removal of doubts" cannot be presumed to be retrospective if it alters or changes the law as it earlier stood (page 597). In this case, in view of the judgment of the Hon'ble Karnataka High Court in the case of EssaeTeraoka (P) Ltd V. Deputy Commissioner of Income Tax, Circle -- 11(3) (2014) 43 Taxmann.com 33 (Kar) the assessee would have been entitled to a deduction of employees’ contribution of PF and ESI if the payment was made before the due date of filing of the return of income u/s 139(1) of the I.T. Act. Therefore, the amendment brought about by the Finance Act, 2021 to sections 36(1)(va) and 43B of the I.T. Act, alters the position of law adversely to the assessee. Therefore, such an amendment cannot be held to be retrospective in nature. Similarly, in view of the decision of the Hon'ble Delhi High Court in the case of CIT Vs Moderate Leasing and Capital Services Pvt. Ltd in ITA 102/2018 dated 31/01/2018 wherein it was held that disallowance u/s 14A should not I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 10 exceed the exempt income Itself and the SLP filed by the Revenue against this judgment was dismissed by the Hon'ble Supreme Court of India in the case of Pr. CIT Vs Moderate Leasing and Capital Services Pvt. Ltd [Special Leave Petition (Civil) Diary No(s). 38584/2018 dated 19/11/2018], the order of CIT(A) in the Appellant's case in holding that disallowance u/s 14A read with Rule 8D cannot exceed the income claimed exempt aligns with the said order. Therefore, the amendment in Sec. 14A by the Finance Act 2022 by inserting an Explanation to Sec. 14A clarifying that no exempt income is earned in any year, disallowance u/s 14A will still be attracted, alters the position of law adversely to the assessee. Hence, such an amendment cannot be held to be retrospective in nature. In arguendo, it is the submission that if the amendment for disallowance of expenditure even where no exempt income is earned is retroactively applied, then as a corollary the dividend income which is now made taxable should also be made applicable retrospectively, and thus no disallowance of expenditure would be warranted. Further, the amendment has been made effective from 01.04.2022 and accordingly applies to A.Y. 2022-23 and onwards. Thus, the amendment does not affect the present appeals wherein the assessment years involved are 2009-10, 2012-13, 2013-14 and 2014-15. In view of the submissions made herein above, it is prayed that all the appeals of the Revenue be dismissed for the following facts reasons:- 1. The Assessing Officer while proceeding to make disallowance u/s 14A computed under Rule 8D has not recorded the satisfaction with well-founded and cogent reasons as to why he thinks that an assessee has incurred any expenditure in relation to such income which does not form part of the total income under this Act having regards to the account of the assessee and 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. 2 The amendment made in Sec. 14A by way of insertion of Explanation by the Finance Act, 2022 provides that the disallowance would be suffered only in the cases where exempt income is not at all accrued or incurred in a particular year whereas in the case of the appellant it has earned exempt dividend income and the disallowance u/s 14A restricted by the Ld. CIT(A) to the extent of exempt income which aligns with the judgment of Hon'ble Supreme Court in the case of Pr. CIT Vs Moderate Leasing and Capital Services Pvt. Ltd (supra); 3 The amendment made to Sec. 14A cannot be presumed to be retrospective as it saddles liability on an assessee in the absence of any legal requirement existing at that point in time. The Hon'ble Supreme Court in the case of M.M. Aqua Technologies Ltd (supra) held that retrospective provision in I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 11 a taxing Act which is "for the removal of doubt" cannot be presumed to be retrospective if it alters or changes the law as it earlier stood; 4. Hence the argument of the Ld. Departmental Representative cannot be accepted that the CIT (A) was not justified in restricting the disallowance u/s 14A to the extent of exempt income. 5. Accordingly the order of Ld. CIT(A) in all the years under consideration be confirmed and appeals of the Revenue be dismissed.” 6. First we take up the issue as to what is the effect of the insertion of the explanation to section 14A vide Finance Act of 2022 and whether the same shall operate prospectively or with retrospective effect. At this stage, we shall have to peek into the legislative history of section 14A. Section 14 of the Income Tax Act specifies that all income shall be classified under five heads i.e. Salaries, Income from house property, Profits and gains of business or profession, Capital gain and Income from other sources except as otherwise provided. There are specific provisions governing the allowance of deductions from income chargeable under these heads of income. However, since the issue in this appeal is related to disallowance of expenditure incurred to earn dividend income either out of the expenditure claimed under business head or out of the expenditure claimed in respect of income from other sources, hence, the provisions section 37 and section 57 being general sections relating to allowance of expenditure in computing the net taxable income of the assessee under the heads “Income from business and profession” and “Income from other sources” are relevant to decide the present issue, which, for the sake of ready reference, are reproduced as under: 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 12 57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :— ........ (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income; The allowance or disallowance of the expenditure isgoverned by the aforesaid provisions of section 37 and section 57 of the Income Tax Act, except otherwise provided for, for the assessment of Income under the Business head and under the head Income from other sources. The above reproduced provisions of section 37and section 57 provide in clear terms that if the expenditure has not been expended wholly and exclusively for the purposes of the business or profession, then the same is not allowable as business expenditure under section 37 of the Act. Similarly, any expenditure which is not laid exclusively for earning of income assessable under the head Income for other sources, same is not allowed as a deduction under section 57 of the Income Tax Act. Before the insertion section 14A into the Act, the allowance or disallowance of expenditure was made applying the aforesaid yard stick as per the provisions of section 37 or section 57 as the case may be, subject to other provisions specifically providing for allowance or disallowance of an expenditure. 7. However, in the case of Rajasthan State Warehousing Corporation Vs. CIT reported in 2002TIOL-2705-SC-IT, the controversy arose as to whether the expenditure can be apportioned as relatable to earning of taxable income and non- taxable income to allow the deduction to the extent the same related to taxable part of the income of the assessee and to disallow the expenditure not expended wholly or exclusively for the purpose of business when the business of the assessee being one and indivisible. The facts were that the Assessee, a State Govt. Corporation, which derived its income from interest and letting out the warehouses, filed its return for I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 13 the relevant AY and claimed deduction of expenditure of Rs.38,13,555.17 u/s 37 of the Act. However, the AO allowed only so much of the expenditure as could be allocated to the taxable income and disallowed the rest of it which was relatable to the non-taxable income, being exempt u/s 10(29) of the Act.TheHon’ble Supreme court referring to the provisions of section 37 of the Act, observed, “A plain reading of the above provision makes it clear that it is a residuary provision and allows an expenditure, not covered under ss. 30 to 36, in computing the income chargeable under the head "Profits and gains of business or profession", provided its other requirements are satisfied. They are: (i) the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession, and (iii) it should have been expended in the previous year.” The Hon’ble Supreme court further noted that the disallowance of the expenditure in the aforesaid case was not for non-compliance of requirements of s. 37(1) of the Act, but for the reason that the expenditure was incurred on an activity from which income was exempted under the Act. The hon’bleSupreme Court laid down the following principles for allowance or disallowance of deduction in such anscenario: - (i) if the income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head, whether or not computation under each head results in taxable income; (ii) if the income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing the "profits and gains of business or profession" when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Income-tax Act, 1961, will depend on : a. fulfilment of requirements of that provision and I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 14 b. on the facts whether all the ventures carried on by him constituted one indivisible business; if they do the entire expenditure will be a permissible deductible but if they do not, the principle of apportionment of the expenditure will apply, because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee. 8. Therefore, the hon’ble Supreme Court held that if all the business carried on by the assessee constitute one indivisible business which earn both taxable and exempt income, the entire expenditure will be deductible and no disallowance of the expenditure relatable to the exempt business could be made. However, if the two businesses producing taxable and exempt income can be bifurcated and do not constitute one indivisible business, then the apportionment of expenditure is permissible. However, the first and foremost condition for allowance of an expenditure is of fulfilment of the requirements of that provision i.e. unless otherwise provided, it must be incurred wholly and exclusively for business as per the provisions of section 37 or else it must be incurred for earning of taxable income under the head Income from other sources. 9. It was pursuant to the judgement in Rajasthan State Warehousing rendered on 23.02.2000 and other judgments laying down the same ratio decidendi that the Legislature inserted section 14A by the Finance Act 2001 with retrospective effect from 1.4.1962, which read as under: “14A.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.” ( This section has been inserted by the Finance Act 2001 with retrospective effect from 1.4.1962. At the time of insertion there were no sub-sections. ) I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 15 10. In the Memorandum explaining the above provision in the Finance Bill, 2001, it has been stated as under: "No deduction for expenditure incurred in respect of exempt income against taxable income - Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, 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 Income-tax Act. The proposed amendment wilt take effect retrospectively from 1st April, 1962 and will accordingly, apply in relation to the assessment year 1962-1963 and subsequent assessment years." 11. Thereafter Circular No. 14/2001, dated 9-11-2001 was issued by the CBDT relating to the provisions of Finance Act, 2001, the relevant part of which is reproduced as under:- "25. No deduction for expenditure incurred in respect of exempt income against taxable income- 25.1 Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income, is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 16 25.2 Through Finance Act, 2001, a new section 14A has been inserted to as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, 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 Income-tax Act. 25.3 It is also being clarified that the assessments where he proceedings have become final before the first day of April, 2001 should not be reopened under section 147 of the Act to disallow expenditure relatable to the exempt income by applying the provisions of section 14A of the Act. 25.4 This amendment takes effect retrospectively from 1st April, 1962, and accordingly, applies in relation to the assessment year 1962-1963 and subsequent assessment years." 12. This section was enacted to overcome the decision of Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation vs. CIT (supra) wherein, it was held that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of expenditure could not be made. However, the legal position as provided under section 37 and section 57 remains the same that only the expenses which are directly related to taxable income are to be allowed as deduction. The provisions of section 14A were inserted neither for any levy of new taxes nor for making of any disallowance of expenditure for the first time, but only to clarify the existing position that any expenditure which is not related to earning of taxable income is not allowable irrespective of the fact that whether taxable income has arisen or accrued or not and conversely any expenditure relatable to non-taxable income was to be disallowed. Further Before proceeding further, even at the cost of repletion, it is to be noted that irrespective of the provisions of section 14A, the legal positions remains the same as it was before the introduction of section 14A that is to qualify for the allowance of deduction of an expenditure, subject to other provisions which provide for allowance of specific expenditures, it must pass the conditions laid down under section 37 that the expenditure has been incurred wholly and exclusively for business or that of the section 57 that the expenditure has been incurred to earn income chargeable as Income I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 17 from other sources, as the case may be. Here, it is pertinent to note that section 57 talks of “Chargeable Income” and it does not speak of allowance of deduction of any non-chargeable income or in other words to say of any exempt income. 13. The intent, purpose and consequences thereof of the insertion of section 14A vide Finance Act of 2001 with retrospective effect came into consideration of the hon’ble Supreme court in the case of CIT vs M/s Walfort Share & Stock Brokers Pvt. Ltd.” reported in [2010] 192 Taxman 211 (SC)/[2010] 326 ITR 1 (SC), wherein, the Hon’ble Supreme Court has explained the reasons for the insertion of section 14A in the following words: “The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22.11.2001). In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 18 income.Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A” (emphasis supplied by us ) 14. Thus, the following points emerge from the above observation of the Supreme court in the case of Walfort (Supra) : 1. Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. 2. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. 3. On the same analogy the exemption is also in respect of net income.The expenses towards non-taxable income must be excluded. 4. If any of the expenses incurred for earning of taxable income are relatable to exempt income also or common expenses have been used for taxable as well as exempt income, the expenses relatable to exempt income have to be apportioned and disallowed. 15. The hon’ble Supreme court in the case of Walfort (supra) has further clarified: “In section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 19 income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). Every pay-out is not entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. .......... Therefore, one needs to read the words "expenditure incurred" in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business.” (emphasis supplied) 16. The Hon’ble Supreme Court, thus, has further clarified that Section 14 of the Act specifies five heads of income which are chargeable to tax. Income to be taxable must fall for classification under one of those five heads, namely, (i) Salaries; (ii) Income from house property; (iii) Profits and gains of business or profession; (iv) Capital gains; and (v) Income from other sources. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. The permissible deductions can be allowed only with reference to income which is brought under one of those heads and is chargeable to tax. If an income does not form part of the total income, then the related expenditure is liable to be disallowed. Every pay-out is not entitled to allowances for deduction. I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 20 Thus, as per the above decision of the Hon’ble Supreme Court, the expenditure can be allowed to the extent it has been incurred for earning of chargeable income as admissible under the relevant provisions of the Act. If expenditure is otherwise not admissible as deduction under the relevant provisions of the Act, the same cannot be allowed as a deduction irrespective of the provisions of section 14A of the Act. However, if an expenditure otherwise seems to be allowable as deduction under the relevant provisions, but the same has an element of incurring for earning of exempt income, section 14A comes into play and apportionment of expenses is to be done and the expenses relatable to earning of exempt income have to be disallowed. The purport of section 14A is thus to make disallowance of expenditure relatable to exempt income. 17. Further, by the Finance Act, 2006, following sub-sections (2) and (3) have been inserted with effect from 1.4.2007 and that the earlier part of section 14A has been renumbered as sub-section (1). “(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does 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 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.]" (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from 11-5-2001). I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 21 18. The purpose of introduction of the provisions of sub-sections (2) and (3) has been explained in - Circular 14 of 2006 of the CBDT. It has been explained that in the existing provisions of section 14A no method for computing the expenditure incurred in relation to income which does not form part of the total income had been provided. As a result there was a considerable dispute between taxpayers and the revenue on the method of determining such expenditure. In this background, sub-section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The method has been prescribed under Rule 8D of the Income Tax Rules, 1962 (inserted by the I.T. (fifth amdt.) Rules 2008 w.e.f. 24.03.2008), which is reproduced as under: "8D. (1) Where the Assessing Officer, 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 relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :— (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :— A×B C Where A =amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 22 B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year." 19 A perusal of the above rule shows that for the purpose of calculation of disallowance under this rule, the value of investments not only income from which “does not” but also “shall not” part of the total income are to be considered. Similarly in Rule 8(2) (iii) the words ‘does not’ and ‘shall not” have been used in respect of exempt income for calculating the disallowance @0.5 % of the value of investments. In our view, the words “does not” and “shall not” have their own significance. The words “does not” refer to the income which has already been received and the words “shall not” refers to the income which may be received. 20. A perusal of the provisions of section 14A would show that section 14A does not seek to confer or provide for allowance of any expenditure as a deduction which, otherwise, is not allowable or in other words has not been incurred for earning of taxable income.The provisions of section 14A in no manner advance any favour to an assessee for the purpose of allowance of an expenditure. It only craves to make a disallowance of expenditure related to exempt income. Allowance of deduction is subject to the condition of fulfilment of requirements of the respective provisions under each head of income. Thus, as per the provisions of section 14A, if an investment has been made for the purpose of earning of tax exempt income (either dividend income or long term capital gains or otherwise any other exempt income) and not for the solely or exclusively for business purpose or for earning of I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 23 taxable income, the related expenditure is not admissible as deduction irrespective of the fact as to whether any tax exempt income has been actually earned /accrued or not. 21. The above position has been further clarified by the CBDT vide its circular No.5 of 2014, as is extracted below: Circular No. 5/2014 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New Delhi dated the 11 th of February, 2014 Subject: - Clarification regarding disallowance of expenses under section 14A of the Income-tax Act in cases where corresponding exempt income has not been earned during the FY -regarding. Section 14A of the Income-tax Act, 1961 ('Act') provides for disallowance of expenditure in relation to income not "includible" in total income. 2. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year. 3. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect ince inception of the Act was clarified vide Circular No. 14 of 2001 as under: "Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income". I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 24 Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial-year or not. 4. The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by the language used in Rule 8D(2(ii) & 8D(2)(iii) of I.T. Rules which are extracted below: "(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:- A*B/C Where........ B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; ................. (iii) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year." (Emphasis added) 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. 7. This may be brought to the notice of all concerned. 8. Hindi version to follow. I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 25 (RohitGarg) Deputy Secretary to the Government of India (F. No.225/182/2013-ITA.II) 22. The CBDT vide aforesaid circular clarified that the disallowance u/s 14A is attracted in respect of expenditure incurred to earn exempt income even where the assessee in a particular year has not earned any exempt income. 23. It is pertinent to note here that the principle laid down by the hon’ble Supreme court in the case of Walfort (supra) has been reiterated by the hon’ble Supreme court in the case of “Godrej & Boyce Manufacturing Company Ltd. vs. Deputy Commissioner of Income-tax” reported in [2017] 81 taxmann.com 111 (SC)/[2017] 247 Taxman 361 (SC). The hon’ble Supreme Court in para 32 & 33 of the judgement observed as under: “32. A brief reference to the decision of this Court in Walfort Share and Stock Brokers (P.) Ltd. (supra) may now be made, if only, to make the discussion complete. In Walfort Share and Stock Brokers (P.) Ltd.(supra) the issue involved was: "whether in a dividend stripping transaction the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14A of the Act?" 33. While answering the said question this Court considered the object of insertion of Section 14A in the Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing the objects and reasons behind introduction of Section 14A of the Act this Court held that: "Expenses allowed can only be in respect of earning of taxable income." In paragraph 17, this Court went on to observe that: "Therefore, one needs to read the words "expenditure incurred" in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax." I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 26 The views expressed in Walfort Share and Stock Brokers (P.) Ltd. (supra), in our considered opinion, yet again militate against the plea urged on behalf of the Assessee.” 24. The Hon’ble Supreme Court further reiterated the above principle in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi reported in 2018] 91 taxmann.com 154 (SC), observing as under: . “In the first instance , it needs to be recognised that as per section 14A of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee “ in relation to income which does not form part of the total income under this Act”. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income, that has to be disallowed” .... ......This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. ** ** ** The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A." 25. To sum up, it has been time and again reiterated by the hon’ble Supreme Court that only the expenditure relatable to earning of taxable income has to be allowed. If the expenditure has not been incurred for the purpose of earning of taxable income, that cannot be allowed irrespective of the fact that any exempt income has been earned or not by incurring such expenditure. However, in a situation where there is a hotchpotch of the expenditure attributable to both earning of taxable and exempt income, the theory of apportionment applies and the expenditure relatable to earning of exempt income has to be disallowed irrespective of the fact that such an expenditure is otherwise allowable under the respective head. 26. However lately, despite the aforesaid legal position and CBDT Circular No.5 of 2014, the different Hon'ble High Courts of the country ruled that no I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 27 disallowance is attracted u/s 14A, in case, the assessee has not earned any income not forming part of the total income and that the disallowance u/s 14A cannot exceed the total tax exempt income earned by the assesse during the year. Reference can be made in this respect to the decision of Hon’ble High Court of Punjab and Haryana in the case of ‘CIT Vs. Winsome Textiles’ (2009) 319 ITR 204 (P&H) and in the case of CIT Faridabad v. Lakhani Marketing INC 226 Taxmann 45 (P&H); Hon'ble Delhi High Court in the case of ‘Cheminvest Ltd Vs. ITO’ (2015) 378 ITR 33 (Delhi) and of the Hon'ble Gujarat High Court in the case of ‘Corrtech Energy P. Ltd. (2014) 45 Taxman.com 116’ and further of the Hon'ble Allahabad High Court in the case of ‘CIT Vs. M/s Shivam Motors (P) Ltd’ (2014) 272 CTR (All) 277. The Hon’ble High Courts based their findings in this respect laying the proposition that as if the disallowance of expenditure u/s 14A is dependent upon the actual earning of exempt income. That if the expenditure incurred for taxable income has the potential of earning of exempt income, the disallowance relatable to exempt income can be attracted only if the exempt income is actually earned during the year. However, in our view, the above interpretation cannot be widened/extended to hold that disallowance of expenditure relatable to exempt income cannot be made if no exempt income is earned or that the disallowance u/s 14A cannot exceed the exempt income received irrespective of the fact that the expenditure claimed is not relatable to earning of chargeable income of the assessee under the relevant provisions of the Act. That, in our view, would be against the respective provisions governing the allowance of deduction out of income chargeable under different heads as provided under the Income Tax Act. 27. So far as the contention thatmere potential to earn an exempt income is not sufficient to make a disallowance in a case where the assessee has not earned any exempt income during the period when an investment has been I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 28 held by him, we note that this question finds its answer in the discussion made by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra) wherein the Hon’ble Supreme Court while rejecting the dominant purpose theory canvassed by the assessee, observed that even if an incidental dividend income is earned in the business of trading in shares, still this triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd.(supra). The Hon’ble supreme court further goes on to make distinction into the cases where the shares are held in stock in trade as compared to the case where shares are held in a company for retaining control over such company by observing as under: “It is to be kept in mind that in those cases where shares are held as ‘stock- in-trade’ it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profit. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits.” (emphasis supplied by us) 28. The Hon’ble Supreme Court thus has distinguished between two type of cases; firstly, where the assessee knows that the investment made by him has the potential of earning of exempt income, though, such investment is made by the assessee for business purposes or to say for earning of taxable income; secondly, about those cases where there is as such no such potential but it would be a quirk of fate that the assessee earns some I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 29 incidental exempt income. This triggers the applicability of section 14A of the Act and which is based on the theory of apportionment of expenditure and between taxable and non-taxable income and to that extent in such cases depending upon the fact of each case, the expenditure incurred in acquiring those shares will have to be apportioned. The Hon’ble Supreme Court, however, held that the disallowance u/s 14A would be attracted in both type of cases rejecting the dominant purpose theory. 29. In order to remove theprevailing doubts about the interpretation of the provisions of section 14A and to overcome the interpretation given by the various High Courts as noted above regarding the applicability of provisions of section 14A and to make the intention of the legislation clear and to make it free from any misinterpretation, the Parliament has brought in an Explanation to Section 14A of the Income Tax Act. Further, sub-section (1) of section 14 has been amended so as to include a non-obstante clause to provide that no direction shall be allowed in relation to exempt income, notwithstanding anything contrary contained in the Act. The amended section 14A is reproduced as under: “Expenditure incurred in relation to income not includible in total income. 14A. (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 does 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 I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 30 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 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.] 30. In the memorandum explaining the provision of Finance Act 2022, it has been explained as under: “Clarification in respect of disallowance under section 14A in absence of any exempt income during an assessment year: Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income as per the provisions of the Act (exempt income). 2. Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year. 3. CBDT issued Circular No. 5/2014, dated 11/02/2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no 32 disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, an assessee incurs an expense of ₹1 lakh to earn non-exempt income of ₹1.5 lakh and also incurs an expense of ₹20,000/- to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued/received during the year, it amounts to holding that ₹20,000/- would be allowed as deduction against non-exempt income of ₹1.5 Lakh even though this expense was not incurred wholly and exclusively for the purpose of earning nonexempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act. I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 31 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 1 st April, 2022. 6. 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 1 st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years. [Clause 9] 31. It is to be noted here that though it has been specifically mentioned in respect of insertion of non-obstante clause in sub-section (1) that amendment will take effect from 1 st April 2022 and will accordingly apply in relation to A.Y 2022-23 and subsequent assessment years, whereas in respect of explanation as noted vide para 5, it is simply written that the amendment will take effect on 1 st April 2022. It has not been mentioned that this amendment will apply in relation to A.Y 2022-23 and subsequent years. 32. Now the question arises whether the aforesaid explanation will be applicable retrospectively or prospectively. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income-tax [2010] 194 Taxman 203 (Bombay) has extensively discussed the legal position on this issue and has summarised the law on the issue of retrospective or prospective operation of a provision while relying upon the various decisions of the hon’ble Supreme Court. The Hon’ble Bombay high Court after analysing the legal position held that the rule 8D of the Income Tax rules would apply prospectively. The relevant part of the order discussing the legal position and judicial precedents is reproduced as under: I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 32 “63. The fundamental principle of law is that Parliament has plenary power to legislate, on matters falling within its legislative competence and that power extends to the enactment of legislation with prospective and retrospective effect. Legislative competence of Parliament to enact the law is not in dispute. Law raises a presumption that an amendment which affects substantive rights and obligations is intended by the Legislature to have prospective effect. On the other hand, amendments on matters of procedure are presumed to be retrospective so as to apply to pending cases. These are, however, presumptions which can be outweighed by the language of an amending statute. That is because the Legislature has plenary power to legislate both prospectively and retrospectively. Therefore, whether an amending provision is to operate with prospective or retrospective effect has to be determined on the language and ambit of the statutory provision. Amendments which are clarificatory or declaratory of the position in law, as the Legislature intended it always to be, are regarded as being retrospective. Hence, when the Legislature steps in by amending the law to set right an incorrect judicial interpretation, an inference can be drawn that the amendment was intended to be retrospective. An amendment which is inserted to remedy unintended consequences and to make a provision workable or which supplies an obvious omission and is required to be read into a section to give it reasonable interpretation has been treated as retrospective in operation. 64. These principles emerge from the precedent on the subject : (i) In ITO v. M.C. Ponnoose [1970] 75 ITR 174 , the Supreme Court dealt with a case where section 2(44) containing the definition of the expression 'Tax Recovery Officer' was substituted by the Finance Act of 1963 and it was provided that the new definition shall be and shall be deemed always to have been substituted. As amended, clause (ii) of section 2(44) empowered the State Government to authorize by notification certain land revenue officers to exercise the powers of a Tax Recovery Officer. The State Government issued a notification dated 14-8-1963 which was published in the gazette on 20-8-1963 authorizing various revenue officers to exercise the powers of the Tax Recovery Officer. The notification stated that it shall come into force on 1-4- 1962. The Tahsildar had effected an attach- ment subsequent to 1-4-1962 but prior to 14-8-1963. The Supreme Court held thus : "Where any rule or regulation is made by any person or authority to whom such powers have been delegated by the Legislature it may or may not be possible to make the same so as to give retrospective operation. It will depend on the language employed in the statutory provision which may in express terms or by necessary implication empower the authority concerned to make a rule or regulation with retrospective effect. But where no such language is to be found it has been held by the courts that the person or authority exercising subordinate legislative functions cannot make a rule, regulation or bye-law I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 33 which can operate with retrospective effect (see SubbaRao, J. in Dr.IndramaniPyarelal Gupta v. W.R. Natu [1963] 1 SCR 721 - the majority not having expressed any different opinion on the point; Modi Food Products Ltd. v. Commissioner of Sales Tax [1955] 6 STC 287, India Sugars Refineries Ltd. v. State of Mysore AIR 1960 Mys. 326 and General S. Shivdev Singh v. State of Punjab [1959] PLR 514 (FB)." (ii) In Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205 , the Supreme Court considered the provisions of section 43B of the Income-tax Act, 1961 which were aimed at curbing activities of those taxpayers who did not discharge their statutory liability towards payment of excise duty, employer's contribution to provident fund etc., for long periods of time, but claimed deductions on the ground that the liability to pay had been incurred in the relevant previous year. While inserting section 43B it was not realized that its language would cause hardship to those taxpayers who had paid sales tax within the statutory period prescribed for payment although the payment did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year and could be paid only in the next quarter which fell in the next accounting year. Hence, though the sales tax had been paid by an assessee within the statutory period prescribed and prior to the filing of the income-tax return, the assessee was unwittingly prevented from claiming a deduction. This was not intended by section 43B. An amendment was made by the Finance Act of 1987 by the insertion of the first proviso. The Supreme Court held that the amendment was curative in nature and hence, the proviso which was inserted by the Finance Act of 1987 should be given retrospective effect from the date of the inception of section 43B. The Supreme Court held that the first proviso was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to an assessee and which made the provision unworkable or unjust in a specific situation : "A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole." (iii) In CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625, the Supreme Court considered the provisions of section 27 of the Income-tax Act, 1961 under which certain persons who are not otherwise legal owners were deemed to be owners for certain purposes. The Finance Bill of 1987 sought to enlarge the meaning of the expression "owner of house property" in clause (iii) of section 27 by providing that a person who comes to have control over the property by virtue of such transactions as are referred to in section 269UA(f) will also be deemed to be the owner of the property. The Supreme Court held that the amendment was intended to supply an obvious omission or to clear up doubts I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 34 as to the meaning of the word "owner" in section 22 and was therefore, declaratory or clarificatory. (iv) CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306, the Supreme Court considered the provisions of section 43B of the Income-tax Act, 1961. By way of the first proviso an incentive/relaxation was given in respect of tax, duty, cess or fee by stating that if this was paid before the date of filing of the return under the Income-tax Act, the assessee would be entitled to a deduction. This relaxation, however, did not apply to contributions to labour welfare funds. By the Finance Act of 2003 uniformity was brought about by equating the payment of tax, duty, cess and fee with contributions to welfare funds. The Finance Act of 2003 was made applicable only with effect from 1-4-2004. Hon'ble Mr. Justice S.H. Kapadia (as the Learned Chief Justice then was) speaking for the Supreme Court held that it was curative in nature and would apply retrospectively with effect from 1-4-1988; (v) In Sharvan Kumar Swarup& Sons' case (supra), rule 1BB of the Wealth-tax Rules, 1958 came up for consideration. Prior to its amendment on 1-4-1989 section 7(1) of the Wealth-tax Act provided that subject to any Rules made in this behalf, the value of any asset other than cash, shall be estimated to be the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date. Under rule 1BB the value of a house used for residential purposes was to be determined in a particular manner. The issue before the Supreme Court was whether this rule was a provision of substantive law, not expressly applicable to valuation for earlier years and therefore, only prospective or whether it was merely procedural and would apply to all pending cases. The Supreme Court held that rule 1BB "merely provides a choice amongst well known and well settled modes of valuation". Chief Justice M.N. Venkatachaliah speaking for the Court held that even in the absence of rule 1BB there would have been no legal impediment to adopt the mode of valuation embodied in rule 1BB by adopting the method of capitalization of income on a number of years' purchase value. The rule, held the Supreme Court, was intended to impart uniformity in valuations and to avoid vagaries and disparities resulting from the application of different modes of valuation in different cases where the nature of the property is similar. Rule 1BB was held to be "essentially a rule of evidence as to the choice of one of the well accepted methods of valuation in respect of certain kinds of properties with a view to achieving uniformity in valuation and avoiding disparate valuations resulting from application of different methods of valuation respecting properties of a similar nature and character". (vi) In Associated Cement Co. Ltd. v. CTO [1981] 4 SCC 578, the Supreme Court held that section 7 of the Rajasthan Sales Tax Act, 1954 which dealt with the submission of returns was not a charging section but a machinery section. The Court held that while charging provisions have to be construed strictly, machinery sections are not generally subject to a rigorous construction. In I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 35 other words, machinery sections have to be construed in a manner such that the charge to tax is not defeated. The principle that arises from the case is that a machinery section should be so construed as to give effect to a charging provision. A machinery section must bear interpretation in accordance with the ordinary rules of construction which is that it must be construed in accordance with the clear intent of the Legislature to make the charge levied effective. (vii) SedcoForex International Drill Inc. v. CIT [2005] 279 ITR 310 was a case where the Supreme Court considered whether the salary of an employee payable for field breaks outside India would be subjected to tax under section 9(1)(ii) read with the Explanation thereto in the Income-tax Act, 1961. Under section 5(2) the scope of total income as regards a non-resident was defined with reference to the receipt or accrual in India, whether deemed or actual. Section 9 defines income deemed to accrue or arise in India. By clause (ii) of sub-section (1) of section 9, income which falls under the head 'Salaries', if it is earned in India is included in such income. The Gujarat High Court had held that the words "earned in India" had to be interpreted as "arising or accruing in India" and not "from service rendered in India". Hence, as long as the liability to pay an amount under the head 'Salaries' arose in India, clause (ii) could be invoked. To overcome this decision, section 9(1)(ii) was amended by the Finance Act of 1983 with effect from 1-4-1979 to include an Explanation. The Explanation provided that income of the nature referred to in the clause payable for service rendered in India shall be regarded as income earned in India. The Gauhati High Court held that the Explanation of 1983 was given effect from 1-4-1979 and would therefore, not apply to assessment years prior thereto. By the Finance Bill of 1999 a new Explanation was substituted with effect from 1-4-2000 which declared that income of the nature referred to in the clause payable for service rendered in India and the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract shall be regarded as income earned in India. The Supreme Court held that given the legislative history of section 9(1)(ii) it was only to be assumed that the Explanation was deliberately introduced with effect from 1-4-2000 and was therefore, intended to apply prospectively. The Supreme Court adverted to three circumstances : firstly, the departmental understanding of the effect of the 1999 amendment as contained in a circular of the Central Board of Direct Taxes afforded a reasonable construction thereof and there was no reason why the Supreme Court should not adopt it. Secondly, the cardinal principle of tax law is that the law to be applied is that in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. Thirdly, where an Explanation to a statutory provision merely clears up an ambiguity or is clarificatory, it must be read into the main provision with effect from the time when the main provision came into force. But if it changes the law, it is not presumed to be retrospective irrespective of I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 36 the fact that the phrases used are "it is declared" or "for the removal of doubts". In that case, where the Explanation sought to give an artificial meaning to the expression "earned in India" and to bring about a change effectively in the existing law and in addition it was stated to come into force with effect from a future date, no principle of interpretation would justify reading the provision retrospectively. (viii) In Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194, the Supreme Court construed the provisions of a proviso inserted into section 36(1)(iii) of the Income-tax Act, 1961 by the Finance Act of 2003 with effect from 1-4-2004. The Supreme Court held that the proviso would not apply to assessment years 1992-93 to 1997-98. (ix) CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308, the question which arose before a larger Bench of the Supreme Court was whether a penalty under section 271(1)(c) of the Income-tax Act, 1961 could be levied if the returned income was a loss. This question had to be considered in the background of the amendment made by the Finance Act of 2002 with effect from 1-4-2003 in Explanation 4 to section 271(1)(c)(iii ). In its earlier decision in the case of Virtual Soft Systems Ltd. v. CIT [2007] 159 Taxman 155, the Supreme Court had rejected the contention of the revenue that the amendment was clarificatory and retrospective holding that the amendment was stated to take effect from 1-4-2003. In Gold Coin Health Food (P.) Ltd.'s case (supra) the larger Bench held that the Court has to analyze the nature of the amendment to come to a conclusion whether it is in reality a clarificatory or declaratory provision. Hence, the date from which the amendment is made operative does not conclusively decide the question. The Court would have to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether the amendment is clarificatory or substantive. Adverting to its earlier decision, the Supreme Court held that the definition of the expression 'income' in section 2(24) is inclusive and includes losses. The Finance Act had merely intended to make what was otherwise implied, explicit. Since the expression 'income' had been held by the Supreme Court to include losses, consequently where in a case on account of addition of concealed income the loss returned stands reduced, a penalty would be leviable even prior to 1-4-2003 if the final assessed income is the loss. The amendment was therefore, regarded as being clarificatory in nature. 65. The following principles guide in determining as to whether an amendment is prospective or retrospective : (i) In determining as to whether an amendment is to take effect prospectively or with retrospective effect, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 37 the amendment to determine whether an amendment is clarificatory or substantive; (ii) An amendment which is clarificatory is regarded as being retrospective in nature and would date back to the original statutory provision which it seeks to amend. A clarificatory amendment is an expression of intent which the Legislature has always intended to hold the field. A clarificatory amendment may be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision. Where the Legislature clarifies its intent, it is regarded as being declaratory of the law as it always stood and is therefore, construed to be retrospective; (iii) Where on the other hand, an amendment seeks to bring about a substantive change in legal rights and obligations, the Court would not readily accept an interpretation of the amendment that would render it retrospective in character. Clear words will be necessary in order to enable the Court to reach to such a conclusion; (iv) Where the amendment is curative or where it is intended to remedy unintended consequences or to render a statutory provision workable, the amendment may be construed to relate back to the provision in respect of which it supplies a remedial effect; (v) Where an amendment essentially provides a rule of evidence such as a method for the valuation of the property by adopting one among a set of well known and well accepted methods of valuation with a view to achieve uniformity in valuation and avoiding disparate valuations resulting from the application of different methods in respect of properties of a similar nature and character, the Court would place a construction on the statutory provision, giving the retrospective effect. 33. The above principles which have culled out by the Ho’ble High Court from various decisions of the Hon’ble Supreme Court it has been settled that in determining as to whether an amendment is to take effect prospectively or with retrospective effect, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive. Further that an amendment which is clarificatory is regarded as being retrospective in nature and would date back to the original I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 38 statutory provision which it seeks to amend. A clarificatory amendment is an expression of intent which the Legislature has always intended to hold the field. A clarificatory amendment may be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision. Where the Legislature clarifies its intent, it is regarded as being declaratory of the law as it always stood and is therefore, construed to be retrospective. Further on the basis of above principles, the hon’ble High Court held that the rule 8D is prospective operation, which finding has been further upheld by the Hon’ble supreme Court. 34. Now applying the same principles, we have to see whether the newly inserted explanation to Section 14A vide Finance Act 2022 would operate prospectively or retrospectively. A perusal of the said explanation reveals that it starts with the words “For the removal of doubts, it is hereby clarified ......” Then the wording in the body of the provision expressly states: “.....the provisions of this section shall apply and shall be deemed to have always applied......” The opening words of the explanation reveal in an unambiguous manner that the said provision is clarificatory and has been inserted for removal of doubts. Further, as provided in the memorandum explaining the aforesaid provision, the aforesaid explanation has been inserted in order to make the intention clear and to make it free from any misinterpretation. The said explanation when seen in the light of the principle laid down by the various decisions of the Supreme Court as discussed above,thereleaves no doubt that the said explanation is clarificatoryin nature inserted for the I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 39 purpose of removal of doubts and to make the intention of the legislature clear and free from misinterpretation and thus the same, obviously, would operate retrospectively. Any contrary interpretation that the said explanation shall operative prospectively will render the words “shall apply and shall be deemed to have always applied” contained in the said statutory provision as redundant and meaningless, which, in our view, is not the intention of the legislature. 35. The aforesaid explanation does not propose to levy any new taxes upon the assessee but it only purports to clarify the intention of the legislature that actual earning or not earning of the exempt income is not the condition precedent for making the disallowance of the expenditure incurred to earn exempt income. This was the legal position as declared by the Hon’ble Supreme Court in the case of Walfort (supra) that the expenses allowed can only be in respect of earning of taxable income that the basic principle of the taxation is to tax the net income and on the same analogy the exemption is also in respect of net income. The Hon’ble Supreme Court thus way back in the year 2010 has, by saying so, held that the expenditure in relation to earning of exempt income has to be disallowed and exemption is only of net income. The Hon’ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (2002-TIOL-751-SC/115 ITR 519 (SC) has held that even if there was no income, the expenditure is allowable. It is now well- settled that income includes loss also as held by the Hon’ble Supreme Court in the case of CIT vs. Harprasad&Co. P Ltd. 99 ITR 118 (SC). As held by the Hon’ble Supreme Court in the case of Walfort (supra) that only the net of the income is taxable i.e. gross income minus expenditure and as discussed above the net income may be a loss also. Since the earning of positive net income is not a condition precedent for claiming deduction of expenditure, on the same analogy, the earning of exempt income is also not a condition I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 40 precedent for attracting disallowance of expenditure incurred to earn exempt income. This position, only, has been reiterated and clarified by the aforesaid explanation to section 14A so as to remove the doubts and to make clear the intention of the legislature and to make the provision of section 14A free from any other interpretation. Therefore, it cannot be said that the aforesaid explanation proposes or saddle any fresh liability on the assessee. We are unable to agree with the contention of the Ld. AR of the assessee that the aforesaid explanation alters or change the law as it early stood. 36. So far as the effect of decision rendered by the various High Courts holding that no disallowance is to be attracted if no exempt income is earned is concerned, it is to be noted that the aforesaid proposition laid by the High Courts has not attained the finality. The issue is still open before the Hon’ble Supreme Court, which, of course is relating to the interpretation of the provisions of section 14A as they existed before the insertion of the aforesaid explanation. The reference can be made to the case titled as PCIT vs. Delhi International Airport Pvt. Ltd. [2022] 138 taxmann.com 113 (SC) wherein the notice has been issued in the SLP filed by the Revenue against the order of the Karnataka High Court [2022] 138 taxmann.com 112 (Kar.) holding that where assessee company did not have exempt income no disallowance can be made u/s 14A. The case of the Revenue is that the said provisions of section 14A provide for disallowance of expenditure even when the assessee during the relevant year had not earned any exempt income. Similarly, notice on this issue has also been issued in another SLP filed by the Department against the decision of the Hon’ble Gujarat High Court in the case of PCIT vs. Adani Wilmar Ltd. [2021] 133 taxmann.com 443 (Guj.). Reference can also be made in this respect to the case titled as PCIT vs. Karnataka State Financial Corporation Ltd. [2022] 137 taxmann.com 195(SC) wherein the notice in the aforesaid SLP has also been issued on the I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 41 same issue. Another SLP of the Department pending on this issue is in the case of CIT vs. Sociedade De Fomento Industrial (P) Ltd. [2021] 130 taxmann.com 428 (SC). Hence, it cannot be said that the law is settled otherwise. The Revenue is contending same proposition that the actual or positive earning of exempt income has nothing to do with the disallowance of expenditure incurred for the purpose of earning of exempt income. Suppose, for the sake of argument, the Hon’ble Supreme Court on the interpretation of the old provision as the existed before the insertion of aforesaid explanation, holds that the disallowance is to be attracted even if no exempt income is earned by the assessee, can then it be canvassed that such verdict of the Hon’ble Supreme Court would amount to change of law or of imposing any tax liability. It is settled position that the provisions as interpreted by the Supreme Court would mean that the same had the same meaning as interpreted by the Supreme Court right from the date of their insertion in this respective statute. In this case, without waiting for any interpretation of the provisions of section 14A by the Supreme Court declaring as to what is the real purpose and object and intention of the legislature in this respect, the legislature itself has given the explanation by way of insertion of the aforesaid explanation to clarify the real intent of the legislature is that the disallowance of expenditure u/s 14A does not depend upon the actual earning of the positive exempt income. Example can be given to the another recent amendment made by the Finance Act of 2022 by way of inserting explanation 3 in section 37 of the Income Tax Act, to clarify that any expenditure incurred by an assessee to provide any benefit or perquisite to a person and acceptance of such benefit by such person is in violation of any law or rule for regulation or guideline shall be included in the definition of expenditure incurred by an assessee for I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 42 any purpose which is an offence or which is prohibited by law and the same shall not be allowed as a deduction. The aforesaid explanation was inserted by the Parliament to clarify that the perquisite and benefits given by the pharmaceutical companies to the doctors for the marketing/promotion of their medicine, is not an allowable expenditure as the acceptance of such benefit or perquisite is unethical for the doctors as per the code of ethics laid down for doctors by the Medical Council of India.The explanation was inserted to overcome certain judicial decisions holding that such type of expenditure by the pharmaceutical companies was allowable as deduction on the analogy that though the acceptance of such benefits may be unethical for the doctors but there was no bar for the companies to incur such expenditure and the same being expended for the purpose of promotion of their business. The issue was pending before the Hon’ble Supreme Court also as to whether such expenditure would be covered under explanation 1 to section 37 for the purpose of disallowance being incurred for an activity which is offence or prohibited by law. Before the said Finance Bill 2022 became an Act of Parliament and the said explanation comes into force, the Hon’ble Supreme Court has the occasion to interpret the existing provisions of section 37in the case M/s Apex Laboratories Pvt. Ltd vs. DCIT Civil Appeal No. /2022/Special Leave Petition (Civil) No. 23207 Of 2019) wherein the Supreme Court held that such an expenditure will attract disallowance being covered under Explanation 1 to section 37. The said finding has been given by the Supreme Court uninfluenced and without taking note of the newly inserted explanation 3 to section 37 clarify the aforesaid position. The interpretation given by the Supreme Court and the clarification given by the aforesaid explanation 3 w.e.f 01.04.2022 being on the same line, it cannot be said that the said explanation has proposed any new law or any new disallowance. Therefore, in view of the interpretation given by the Supreme Court, it is to be assumed that such intention of the legislature was always there to ascribe such meaning to the said provision I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 43 right from the very beginning independent of the newly inserted explanation. In view of this, it cannot be said that by the insertion of explanation to section 14A has the effect of any change of law or to fasten any new liability upon the tax payers. It is only to make the intention of the legislature clear and to remove the confusion and doubts that has arisen pursuant to the aforesaid decisions of various High Courts. 37. So far as the contention of the Ld. Counsel for the assessee that in the case of CIT vs. Moderate Leasing and Capital Services Pvt. Ltd. (supra) the SLP against the order of Delhi High Court has been dismissed, therefore the said order has attained finality, it is to be noted that it has been held time and again by the apex court of the country that the dismissal of an SLP against an order or judgment of a lower forum is not an affirmation of the same. If such an order of the Supreme Court is non-speaking, it does not constitute a declaration of law under Article 141 of the Constitution or attract the doctrine of merger. Reliance can be placed on the judgement in the case of “ P. Singaravelan and others vs. District Collector, Tiruppur and DT and others [(2020)3 SCC 133]” . The Apex Court in the case of Kunhayammed v. State of Kerala [(2000)6 SCC 359] has held that an order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An non speaking order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed. Also, in case of C.G. Govindan v. State of Gujarat and others [(1998) 7 SCC 625], the Supreme Court observed that this Court in the case of Supreme Court Employees’ Welfare Association v. Union of India and Anr. (1989(4) SCC 187, State of Orissa and another v. DhirendraSundar Das and others [(2019) 6 SCC 270], Employees’ Welfare Association v. Union of India & Anr.12 and State of Punjab v. Davinder Pal Singh Bhullar13, has observed I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 44 and reiterated that it is a well settled principle of law that when a special leave petition is summarily dismissed under Article 136 of the Constitution, by such dismissal, Supreme Court does not lay down any law as envisaged by Article 141 of the Constitution. It, therefore, follows that when a special leave petition is dismissed simpliciter, it cannot be said that there has been a declaration of law by the supreme Court under Article 141 of the Constitution. In view of the above legal position, the mere dismissal of SLP in the case of CIT vs. Moderate Leasing and Capital Services Pvt. Ltd. (supra) does not imply that any law has been laid down on the issue by the Supreme Court. Neither the above dismissal amount to the affirmation of the decision of the High court nor the doctrine of merger applies. 38. So far as the contention raised by the ld. Counsel for the assessee that whether the legal position laid down by the Courts that the Assessing Officer must first record satisfaction as to the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income before invoking rule 8D for disallowance of expenditure u/s 14A should still be adhered to or not, we find that the aforesaid explanation introduced vide Finance Act 2022 does not in any manner change this position. The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra) has clearly held that before applying the theory of apportionment, the AO need to record satisfaction that having regard to the accounts of the assessee, suomoto disallowance u/s 14A was not correct. There is no change of this legal position even after introduction of the aforesaid explanation. 39. So far as the contention of the ld. Counsel for the assessee that the aforesaid explanation talks of only those cases where no exempt income has been earned and that the said explanation is not applicable to cases where the assessee has earned some exempt income, we do not find ourselves in agreement with the aforesaid proposition. Such a proposition may place the different assessees in inequitable position. In such scenario, in a case where I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 45 an assessee does not earn any exempt income, he may suffer disallowance as per the formula prescribed under Rule 8D, whereas, in a case where an assessee earns some meagre exempt income, the disallowance in his case would be restricted to such meagre exempt income and the assessee having no exempt income will have to suffer more disallowance than the assessee having meagre exempt income. Even otherwise, in view of the discussion made above, the explanation seeks to clarify the position that the disallowance of expenditure relatable to exempt income is not dependent upon actual earning of any exempt income. 40. Now coming to the facts of the present case, the assessee during the year had earned tax exempt dividend income of Rs.3,70,80,750/- and had made suo moto disallowance of Rs.22548285/- u/s 14A. The AO noted that the assessee had debited interest expenses of Rs.8,79,14651/-. The AO further noted that the assessee was not maintaining separate books of accounts. He noted that as per the balance sheet the assessee had invested 1,86,82,00,000/- in equity shares whereas the availability of interest free funds with the assessee was only of Rs.17,30,86,083/-. The AO therefore, show-caused the assessee as to why the provisions of 14A should not be invoked and the interest attributable to the investment in shares should not be disallowed. The AO noted that the assessee however has not given any details regarding the source of fund invested in shares and the interest relatable to such investment. Further the assessee has made suo moto disallowance by not following any systematic or specific method of calculation but only on estimation on the basis of disallowance made in assessment orders in earlier assessment years. Since the assessee could not show to the AO as on the basis of what methodology the suomoto disallowance was made by the assessee, therefore, the AO proceeded to compute the disallowance by applying Rule 8D. A perusal of the assessment order reveals that the same is a detailed and speaking order recording the I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 46 reasons on the basis of which the AO was not satisfied with the suo moto disallowance made by the assessee. In appeal before the CIT(A), the assessee took the plea that he had made strategic investment in group companies for business purposes. However, the ld. CIT(A) relied upon the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra) and rightly held that dominant purpose theory was not applicable for the purpose of apportionment of expenditure relatable to exempt income. However, the ld. CIT(A) accepted the contention of the assessee that the disallowance u/s 14A cannot exceed the exempt income earned during the year relying upon the decision of the Delhi High Court in the case of PCIT vs. Moderate Leasing and Capital Services Pvt. Ltd. (supra). In view of our discussion made above and in view of the fact that we have held that the explanation to section 14A inserted by Finance Act 2022 being clarificatory in nature has retrospective effect, the impugned order of the CIT(A) is not sustainable in the eyes of law and the same is accordingly set aside. The order of the Assessing Officer is hereby restored. The appeal of the Revenue stands allowed. 41. Since the facts and issues involved in all the captioned appeals are identical, hence, our findings given above will mutatis mutandis apply to all the captioned appeals and, therefore, all the captioned appeals of the Revenue stand allowed. The impugned order of the CIT(A) in all the captioned appeals is set aside and that of the Assessing Officer is hereby restored. Kolkata, the 6 th July, 2022. Sd/- Sd/- [Manish Borad] [Sanjay Garg] Accountant Member Judicial Member Dated: 06.07.2022. I.T.A. Nos.154 to 156/Gau/2019 Assessment Years: 2012-13 to 2014-15 IT.A. No.159/Gau/2019 Assessment Year: 2009-10 Williamson Financial Services Limited 47 RS Copy of the order forwarded to: 1. ACIT, Circle-3,Guwahati 2. Williamson Financial Services Limited 3. CIT(A)- 4. CIT- , 5. CIT(DR), //True copy// By order Assistant Registrar, Kolkata Benches