M/s. Muthoot Vehicle And Asset Finance Ltd, Ernakulam V. The ACIT, Kochi

ITA 357/COCH/2020

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 0866 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Assessment Year: 2013-2014
• Appeal Filed On: 30-09-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A; 119

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Chandra Poojari, AM & Shri George George K, JM ITA No.357/Coch/2020 : Asst.Year 2013-2014 M/s.Muthoot Vehicle & Asset Finance Limited, Muthoot Chambers, Benerji Road Kochi – 682 018. PAN : AADCM4352R. v. The Assistant Commissioner of Income-tax, Corporate Circle 1(2) Kochi. (Appellant) (Respondent) Appellant by : Sri.V.M.Veeramani, CA Respondent by : Smt.J.M.Jammuna Devi, Sr.DR Date of Hearing : 02.08.2022 Date of Pronouncement : 03.08.2022 O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against CIT(A)’s order dated 27.07.2020. The relevant assessment year is 2013-2014. 2. Two issues are raised, namely, (i) disallowance of Rs.6,66,499 u/s 14A of the I.T.Act; (ii) disallowance of Rs.10,15,393 u/s 43B(f) of the I.T.Act. We shall adjudicate the above issues as under: Disallowance u/s 14A of the I.T.Act Rs.6,66,499 3. The Assessing Officer had disallowed a sum of Rs.6,66,499 by invoking the provisions of section 14A of the I.T.Act. The A.O. by placing reliance on the CBDT Circular No.5 of 2014 dated 11.02.2014, rejected the plea of the ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 2 assessee that no disallowance u/s 14A of the I.T.Act is warranted, since for the relevant year it was not in receipt of any exempt income from the investments made. On further appeal, the CIT(A) confirmed the view taken by the A.O. 4. Aggrieved, the assessee has raised this issue before the ITAT. The learned AR contended that when no exempt income is earned during the year, disallowance u/s 14A of the I.T.Act is not attracted. In support of his contention, the learned AR relied on the following judicial pronouncements:- (i) Principal CIT v. IL & FS Energy Development Co. Ltd. [399 ITR 483 (Delhi)] (ii) Chem Invest Ltd. v. CIT [378 ITR 33 (Delhi)] (iii) Redington India Ltd. v. Addl.CIT (392 ITR 633) (iv) Order of the ITAT Cochin Bench in the case of ITO v. Kerala Ayurveda Ltd. in ITA No.506/Coch/2016 (order dated 14.12.2017). (Wherein it was held that the disallowance u/s 14A cannot exceed the exempt income.) 5. The learned Departmental Representative supported the orders of the A.O. and the CIT(A). 6. We have heard rival submissions and perused the material on record. Admittedly, for the relevant year, the assessee was not in receipt of any exempt income on the investments made by it. When the assessee is not in receipt of any exempt income, no disallowance u/s 14A of the I.T.Act is ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 3 warranted. In this context, we rely on the following judicial pronouncement:- (i) Principal CIT v. IL & FS Energy Development Co. Ltd. [399 ITR 483 (Delhi)] (ii) Chem Invest Ltd. v. CIT [378 ITR 33 (Delhi)] (iii) Redington India Ltd. v. Addl.CIT (392 ITR 633) (iv) Order of the ITAT Cochin Bench in the case of ITO v. Kerala Ayurveda Ltd. in ITA No.506/Coch/2016 (order dated 14.12.2017). (v) PCIT v. Novell Software Development (India) Pvt. Ltd. reported in (2021) 434 ITR 154 (Karnataka) 7. It is to be mentioned that the Finance Act 2022 had amended section 14A of the I.T.Act, whereby it is stated that irrespective whether the assessee is not in receipt of exempt income, disallowance u/s 14A of the I.T.Act can be made. However, the Hon’ble Delhi High Court in the case of Pr.CIT v. M/s.Era Infrastructure (India) Ltd. in ITA 204/2022 (judgment dated 20.07.2022) had held that the amendment is prospective and applies for and from assessment year 2022-2023 onwards. The relevant finding of the Hon’ble Delhi High Court, reads as follows:- “5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to Section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: “4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 4 provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1st April, 2022. 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 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.” (emphasis supplied) 6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 has held that a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced herein below: “9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us. 10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau)] . It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318) “[I]t is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has (sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand.” 11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 5 for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years. 12. In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read: “Explanation.—For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for— (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India.” The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1- 4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on for any purpose for an anterior period. 14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. S.R. Patton [(1998) 8 SCC 608] .) 15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4- 2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) : (1995) 215 ITR 165] . It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 6 Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3. “5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India. 5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years.” 16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under Section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it. 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67] .) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24] . If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506] . But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.” (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M Aqua Technologies Ltd. V. Commissioner of Income Tax, Delhi-III, 2021 SCC OnLine SC 575. The relevant portion of the said judgment is reproduced hereinbelow:- “22. Second, a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 as follows: ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 7 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”. 18. There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word “earned” had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income “arising or accruing in India”. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, “income payable for service rendered in India”. 19. When the Explanation seeks to give an artificial meaning to “earned in India” and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.” (emphasis supplied) 8. Consequently, this Court is of the view that the amendment of Section 14A, which is “for removal of doubts” cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.” 8. In view of the above judicial pronouncements, since the assessee was not in receipt of exempt income during the relevant assessment year, we hold that no disallowance u/s 14A of the I.T.Act is called for. It is ordered accordingly. In the result, grounds 2 and 3 are allowed. ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 8 Disallowance u/s 40B(f) of the I.T.Act Rs.10,15,393 9. The A.O. had disallowed a sum of Rs.10,15,393 u/s 43B(f) of the I.T.Act. The A.O. held that disallowance is warranted in view of the judgment of the Hon’ble Kerala High Court in the case of South Indian Bank Limited v. CIT reported in 363 ITR 111. The CIT(A) confirmed the disallowance made by the A.O. 10. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR’s limited contention is that disallowance u/s 43B(f) of the I.T.Act is to be restricted to only a sum of Rs.5,73,740. 11. The learned DR was duly heard. 12. We have heard rival submissions and perused the material on record. During the course of hearing, the learned AR candidly admits that there is no grievance insofar as the disallowance u/s 43B(f) of the I.T.Act is concerned. However, the learned AR submitted that the disallowance should be restricted to Rs.5,73,740. The contentions of the learned AR for restricting the disallowance to Rs.5,73,740, are as follows:- “The CIT(A) went wrong in confirming the disallowance of Rs.10,15,393 made by the assessing officer without considering the Ground no.5 of the Grounds of Appeal. The disallowance of Rs.10,15,393 was wrong since your appellant had debited to Profit and Loss Account for the year only a sum of Rs.6,08,591 and hence the disallowance should have been restricted to the amount claimed in the profit and loss account. Further, your appellant had paid a sum of Rs.34,851 during the year against the provision made in earlier years and hence this should have been allowed as deduction. Your ITA No.357/Coch/2020. M/s.Muthoot Vehicle & Asset Finance Limited. 9 appellant was not given an opportunity to explain these facts by the CIT(A).” 13. On a perusal of the orders of the A.O. and the CIT(A), it is seen that the assessee had not taken this contention before them. Therefore, in the interest of justice and equity, the matter is restored to the files of the A.O. The A.O. shall consider the claim of the assessee and shall take a decision in accordance with law. It is ordered accordingly. 14. In the result, the appeal filed by the assessee is partly allowed. Order pronounced on this 03 rd day of August, 2022. Sd/- (Chandra Poojari) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Kochi ; Dated : 03 rd August, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-1, Kochi. 4. The CIT, Kochi. 5. The DR, ITAT, Cochin. 6. Guard File. Asst.Registrar/ITAT, Cochin