Income Tax Appellate Tribunal - Delhi
Aquarius Travels (P) Ltd. vs Income Tax Officer on 15 February, 2008
Equivalent citations: [2008]111ITD53(DELHI), [2008]301ITR111(DELHI), (2008)114TTJ(DELHI)584
ORDER
P.N. Parashar, J.M.
1. This appeal filed by the assessee relating to the asst. yr. 1998-99, has been heard by the Special Bench in pursuance of the Order passed by the Hon'ble President, under Section 255(3) of the IT Act, 1961.
2. The facts and circumstances leading to the constitution of the Special Bench are as under:
The assessee, namely, M/s Aquarius Travels (P) Ltd. filed appeal against the Order of the learned CIT(A) dt. 12th Nov., 2001 for asst. yr. 1998-99 to challenge the sustenance of disallowance of expenses relating to interest paid to the tune of Rs. 12,94,978. The learned Members of the Division Bench, hearing the appeal, were of the opinion that it is a fit and proper case which may be heard by the Special Bench of the Tribunal. For this purpose, they have narrated the relevant facts to indicate that one of the issues involved requires examination of ambit and scope of Section 14A for deciding the allow ability of interest.
3. These facts are given in Paras 1 and 2 of the Order of Division Beikbxm its Order dt. 7th Dec, 2006 and are as under:
1. The assessee derives income from the business of sub-letting of properties. In addition, it also received income from interest and dividend. The assessee received interest income of Rs. 6,79,678 on interoperate deposits and received dividend of Rs. 3,06,630 from a subsidiary company. The dividend related to financial year 1995-96 but was declared and received on 9th May, 1997 i.e. during this assessment year. The assessee had declared the entire income from sub-letting, interest and dividend as business income. The assessee paid interest of Rs. 20,34,339 on borrowings made, which has been claimed as deduction. The perusal of the balance sheet shows that in the beginning of the year i.e. on 1st April, 1997, the share capital and the reserves were to the tune of Rs. 22.60 lacs and the loans taken amounted to Rs. 1.45 crores. As against that, the investments were: Rs. 16.42 lacs in fixed assets; Rs. 88.82 lacs in shares and Rs. 99.53 lacs in loans and advances. These figures clearly show that substantial borrowings were utilized for investment in shares as own funds were only to the tune of Rs. 22.60 lacs out of which investments in fixed assets alone were Rs. 16.42 lacs. AO held that the subletting was the only business of the assessee and for this business, borrowings were not required. He assessed the interest and dividend income as income from other sources. As the dividend related to financial year 1995-96, the AO held that interest on borrowing utilized for investment in shares had no nexus with income from dividend. He allowed deduction of interest proportionate to the borrowings invested in the inter-corporate deposits, which had earned an interest of Rs. 6,79,678. The balance interest of Rs. 12,94,978 (20,34,339 - 6,79,678) was disallowed as not incurred for the purpose of business. In appeal, CIT(A) confirmed the Order of the AO against which the assessee is in appeal before the Tribunal.
2. The assessee has challenged the disallowance of interest. The assessee has firstly argued that the assessee during the year had earned dividend from investment in shares which had been offered for tax. There is no interest free advance given to any person. The borrowings had thus not been utilized for any tax-free income and therefore there is no case of disallowance of interest. The other argument is that even if the dividend income was exempt, the assessee had a composite activity of sub-letting, inter-corporate deposits and investments in shares and therefore, interest on borrowings utilized for the composite business activities has to be allowed even if some of the activities do not yield any taxable income. Reliance has been placed on the judgments of Hon'ble Supreme Court in the case of CIT v. Indian Bank Ltd. and in case of Rajasthan State Warehousing Corporation v. CIT . The attention of the learned Authorised Representative was drawn to Section 14A which was inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962 as per which any expenditure incurred by the assessee in relation to the income which does not form part of total income, is not allowable. In view of this provision, judgments of Hon'ble Supreme Court mentioned earlier which were delivered prior to insertion of Section 14A were not applicable. Thus, even if income from investments is accepted as business income, expenses relating to investment in shares is exempt from tax. After the record date for dividend in May 1997, investment in shares is not going to yield any taxable income as the dividend income is exempt from tax w.e.f. 1st June, 1997. Therefore interest payable on such borrowings for the period 1st June, 1997 to 31st March, 1998 is not allowable in view of Section 14A. In fact, before CIT(A) the assessee had made an alternate submission that, disallowance of interest if any could only be made for the period 1st June, 1997 to 31st March, 1998.
4. After considering these facts, relevant provision of the IT Act and the Orders of different Benches of the Tribunal on the issue, the Division Bench forwarded the record of the appeal to the Hon'ble President for constituting a Special Bench. The relevant findings of the Division Bench in this regard are as under:
Thus, there is a difference of opinion between different Benches regarding applicability of proviso to Section 14A to the proceedings pending in appeal. We, therefore, consider it appropriate to request the Hon'ble President to constitute a Special Bench to decide the following issue:
Whether the proviso to Section 14A will apply to assessment, of earlier years i.e. asst. yr. 2001-02 and preceding assessment years which are pending in appeal and the appellate authorities are not empowered to confirm any disallowance of expenses relating to exempted income under Section 14A?' We have also come across some related issues on which there is difference of opinion between different Benches. The issues are mentioned below:
(i) Whether CIT is empowered to take action under Section 263 in matter of disallowance of expenses under Section 14A for the asst. yr. 2001-02 and earlier years?
(ii) Where in a case no disallowance of expenses in relation to exempted income has been made by the AO under Section 14A, CIT(A) has power to make an enhancement during the appellate proceeding pending before him in relation to the said expenses?"
5. However, while constituting the Special Bench the Hon'ble President directed the Special Bench to decide the following questions and also to ' dispose of the entire appeal:
1. Whether on the facts and in the circumstances of the case the provision of Section 14A can be invoked in the appellate proceedings?
2. Whether on the facts and circumstances of the case decisions of Tribunal in the case of Navtn Bharat Industries Ltd. v. Dy. CIT I.T.A. No. 2201/Bom/1994 for asst. yr. 1990-91) reported at (2005) 92 T.T.J. (Mumbai)(TM) 1166-Ed. and decision in the case of Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/2004) are applicable or distinguishable?
At the time of hearing of the appeal, another applicant namely, Credit Agricole Indosuez who filed ITA No. 6400/Mum/2003 for asst. yr. 1997-98 in Tribunal Mumbai, moved application to intervene in the matter. The application was allowed vide Order dt. 13th March, 2007. However, it was made clear that the intervener shall advance argument in support of the arguments of the appellant on the main issue and on the facts of the case of the appellant only.
6. Thereafter, vide application dt. 23rd March, 2007 the appellant made 'request for considering and deciding another question which is as under:
Whether considering the provisions and objectives of the proviso to Section 14A, can any disallowance be made by invoking the provisions of Section 14A for any assessment year beginning on or before the 1st day of April, 2001, by:
(a) the Hon'ble Tribunal in an appeal pending before it; or
(b) the learned CIT(A) in an appeal pending before such authority;
when in either of the aforementioned cases it has not been invoked during assessment proceedings?
7. Vide Order dt. 11th April, 2007 it was directed that the question raised by the applicant being of general nature shall be treated as Question No. 1 and the questions already referred to the Special Bench shall be treated to be question Nos. 2 and 3. Thus the following three questions are to be examined and adjudicated by this Bench:
1. Whether considering the provisions and objectives of the proviso to Section 14A, can any disallowance be made by invoking the provisions of Section 14A for any assessment year beginning on or before the 1st day of April, 2001, by:
(a) the Tribunal in an appeal pending before it; or
(b) the CIT(A) in an appeal pending before such authority;
when in either of the aforementioned cases it has not been invoked during assessment proceedings?
2. Whether on the facts and in the circumstances of the case the provision of Section 14A can be invoked in the appellate proceedings?
3. Whether on the facts and circumstances of the case decisions of Tribunal in the case of Navin Bharat Industries Ltd. v. Du. CIT I.T.A. No. 2201/Bom/1994 for asst. yr. 1990-91, reported at (2005) 92 T.T.J. (Mumbai)(TM) 1166-Ed. and decision in the case of Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/2004) are applicable or distinguishable?
8. Before considering the controversy and before taking up the specific issues involved in the questions, as referred to above, we deem it proper to narrate entire relevant facts relating to the matter in brief. These facts are as under.
8.1. The assessee company was engaged in the business of acquiring movable and immovable properties and leasing them on rent. It also received service charges for maintenance of properties. The assessee had debited a sum of Rs. 20,34,339 in the P&L a/c under the head "Interest". This included bank interest and interest paid to others. The assessee company had total fund of Rs. 1,46,42,880 as on 31st March, 1998 which included loan of Rs. 1.15 crores, out of which a sum of Rs. 98,39,135 was invested in the share capital with its associate concern, namely, M/s United Leasing & Industries Ltd. The AO found that borrowed funds were invested in share capital of its sister/subsidiary companies by the assessee. He, therefore, required the assessee to explain how the interest of Rs. 19,74,656 paid to others was incidental to the business of the company and to prove nexus that it was wholly and exclusively laid out for the business purpose of the assessee company. The contention of the assessee was that it was deriving income from subletting of properties, interest on advance and dividends on shares and that income from these sources had always been assessed under the head "Income from business and profession". It was explained that income from dividend and interest was part of its business activity. It was submitted that in the assessment year under consideration the company had shown dividend income of Rs. 3,06,630 which amount was duly offered for taxation during the year. It was further pointed out that no dividend has been claimed as exempt under Section 10(33) of the Act during the assessment year under consideration. Thus, the claim of the assessee was that since all the activities relating to earning of income were undertaken simultaneously and there was intermixing of the funds, any part of borrowed funds cannot be linked or identified with any particular activity, hence the entire interest was allowable as business expenditure. It was specifically pleaded that even if the income from dividend was taken to be exempt during the year under consideration, since the loan had been borrowed for business purposes, the conditions set out in Section 36(1)(iii) of IT Act are satisfied and therefore the interest is allowable.
8.2. The AO, after considering the relevant material came to the Conclusion that business activity of the assessee was sub-letting of properties and the interest expenses were not laid out for this activity. He applied the provisions of Sections 56 and 57 of the IT Act and disallowed interest to the tune of Rs. 12,94,978. The income was computed by him accordingly. The relevant portion of the assessment Order in this regard is as under:
5. in view of the above discussion, it is held that business activity of the assessee was sub-letting of properties and the interest expenses were not laid out for this activity of business. The interest income was generated from the funds deposited with its sister/subsidiary companies and it was not a business activity of the assessee. The chargeability of interest income comes within the purview of Section 56 of the IT Act and the expenses to be allowed on this income falls under the provision of Section 57 of the Act. For allowing expenses under Section 57 there should be direct nexus between the income and expenses. The interest paid to others could be at the most said to have direct link with interest income of Rs. 6,79,678 declared by the assessee company. Therefore, the expenses are allowed to the extent of interest income available. The balance expenses of Rs. 12,94,978 is disallowed being not incidental to the earning of interest income. Though in the year under consideration, dividend income has been shown at Rs. 3,06,630. But the same relates to earlier year and has only been declared during the year. So, there is no nexus between the declared dividend income and interest expenses incurred by the company. Moreover, the dividend income is exempt under Section 10(33) of the IT Act. As the dividend income was from earlier year the same was not claimed exempt under Section 10(33) of the IT Act by the assessee. Accordingly, while considering the allow ability of interest expenses, no weight age could be given to the dividend income declared in this year. With these remarks, total income is computed as under:
6. Income processed under Section 143(1)(a) of the IT Act 12,54,140 Add : Interest expenses allowed as discussed 12,94,978 Total income : 25,49,118
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Rounded off 25,49,120
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8.3 In appeal, the assessee challenged the findings of the AO. It was maintained before the learned CIT(A) that even if the interest was to be disallowed, then the same would be disallowed only after 1st June, 1997 i.e. when the dividend income became exempt under Section 10(33) and the interest pertaining to the period upto 31st May, 1997 should be allowed. It was thus prayed that the AO should be directed to allow interest of Rs. 12,94,978. In support of its submission, the assessee placed reliance on the decision in the case of CIT v. Indian Bank Ltd. and the decision in the case of Rajasthan State Warehousing Corporation v. CIT . The learned CIT(A), however, rejected the pleas taken before him and upheld the Order of the AO by observing as under:
8. It will be clear from the above reproduction that for the purpose of business the appellant company is investing only idle funds which are required for the main objects at section Nos. 1 to 5 in shares and deposits. The appellant is accordingly not making any borrowings of taking any deposits for the purpose of earning income from interest or dividends. The interest/dividends earned by the company on her surplus funds would be taxable under the head other sources. The AO has already allowed interest to the extent of interest income earned by the appellant under the head other sources. As the remaining interest was on borrowings which were not wholly and exclusively for the purpose of business the same would not be allowable. The Order of the AO holding the dividends to pertain to the preceding year and disallowance of interest of Rs. 12,94,478 is upheld.
8.4 The assessee thereafter challenged the Order of the learned CIT(A) before the Tribunal by taking following grounds:
1. That on the facts and in the circumstances of the case and under the provisions of the law, the lower authorities have erred in disallowing interest to the tune of Rs. 12,94,978.
2. That your petitioner reserves the right to assail the assessment on any additional ground which may be advanced at the time of hearing of the appeal.
4. In the setting of above factual background, we proceed to consider the general issues involved in the questions referred to the Special Bench.
5. Shri R.M. Mehta, advocate, appeared on behalf of the appellant whereas Shri P.F. Kaka, advocate appeared for the intervener, namely, Credit Agricultural Indo Swiss. Shri Rajnish Kumar, CIT-Departmental Representative and Shri K.C. Jain, CIT-Departmental Representative have represented the Revenue before the Special Bench. All the parties have filed written submissions and case laws besides submitting the oral arguments in relation to the questions referred.
6. The learned Counsel for the assessee Shri Mehta, at the outset, pointed out that in this matter the Department has not filed any cross-objection nor made any request orally or in writing for invoking Section 14A and in absence of any request from any party, the Tribunal cannot, suo motu, invoke the provisions of Section 14A. The learned Counsel thereafter took up the issue relating to burden to prove. According to him, generally a person who alleges something, has to prove it. Proceeding further, he submitted that if assessee claims any deduction then the burden shall be upon him and if the Department wants to disallow deduction on any specific ground or under any special provision of law, then the burden to prove shall rest on the Revenue. Thus, it was canvassed by him that if the Department wants to invoke Section 14A, then the onus will shift to the Department to prove that the expenditure incurred by the assessee related to exempt income. It was contended by him that it is to be determined as to at what stage the assessee is required to prove the genuineness or the justifiability of the expenditure and at which stage the burden will shift to the Department.
6.1 The next submission of the learned Counsel for the assessee was that at the stage of assessment or at the stage of appellate proceedings neither the AO nor the learned CIT(A) ascertained the facts and material relating to disallow ability of expenditure under Section 14A and if the Tribunal invokes the provisions contained under Section 14A to disallow the expenditure then the consequence will be that the matter will have to be restored to the AO who will be allowed to reopen the whole thing for the adjudication of the issue which power is not given to the AO because of the restriction imposed under the proviso to Section 14A introduced w.e.f. 11th May, 2001. The contention of the learned Counsel, therefore, was that firstly the Tribunal cannot invoke the provisions under Section 14A in absence of any request from any party. Secondly the Tribunal cannot disallow expenditure in view of the provisions contained under Section 14A because the relevant material has not been collected and produced on record by the Revenue. Thirdly, in case the Tribunal does so and restores the matter to the AO for collecting the material, then the Tribunal will be permitting the AO to do an act, which would not be within his powers; and fourthly, while doing so, the Tribunal will be enhancing the liability of the assessee. It was also submitted that since the issue relating to disallow ability of interest does not arise out of the Order of AO or that of the learned CIT(A), it would amount transgression of power by the Tribunal. In support of his submission, the learned Counsel placed reliance on the ratio of decisions reported in Karnataka State Forest Industries Corpn. Ltd. v. CIT ; R.L. Rajgharia v. ITO ; CIT v. Samsul Huda (1995) 216 I.T.R. 712 (Gau); CIT v. Manick Sons and J.B. Greaves v. CIT .
6.2. The learned Counsel also pointed out that, it is not within the power of the Tribunal to raise any ground suo motu which would work adversely to the assessee and which makes the position of the assessee worse than it was before filing of the appeal. In support of this argument, the learned Counsel placed reliance on the ratio of decisions reported in Kanpur Industrial Works v. CIT ; and CIT v. Anand Prasad and Ors. .
6.3. On the facts of the present case, it was explained by him that the AO did not take up the issue relating to disallowance under Section 14A and that when the assessment Order was passed by him, Section 14A was not on the statute. Regarding the appellate proceedings before the learned CIT(A), it was pointed out by him that the statutory provisions contained under Section 14A came on the statute but the learned CIT(A) has not made the disallowance under Section 14A by taking recourse to it. He further pointed out that even before the Tribunal the Department did not raise the issue before the Division Bench. He also submitted that the Department did not raise any additional plea before the Tribunal and even if it desired to do so, additional ground could have been raised only relating to a question of law and that too when the entire material for adjudication of such question was available on record. After making reference to Rule 11 of Tribunal Rules, his submission was that additional ground has to relate to the subject matter of the appeal and since in the instant case neither any additional ground was raised nor could have been raised, it is not within the scope and powers of the Tribunal to raise such ground suo motu.
6.4 On the issue regarding finality of the assessment proceedings, his submission was that the assessment has to be considered in its context and thus the power of Tribunal is not to raise those issues which were not taken before the learned CIT(A). For supporting these submissions he placed reliance on the decision reported in CAT v. Late Begum Noor Banu Alladin .
6.5. On the scope and power of Tribunal, he also contented that the word "thereon", appearing in Section 254 of the IT Act, confers limited powers on Tribunal and the Tribunal cannot give a direction when there is no cross-appeal by the other party, as is the case here.
6.6. Coming to the issue of disallowance of interest under Section 36(1)(iii) of the IT Act, which issue was raised before the Tribunal, his contention was that for allowing or disallowing interest under Section 36 of IT Act, it is to be seen that the interest was incurred for business purposes and for commercial expediency or not, but so far as Section 14A is concerned, the Department is required to prove that the expenditure was incurred which related to earning of exempt income i.e. borrowed funds were used for the earning of tax-free income. He also pointed out that in the return, the assessee did not claim any income to be exempt and whatever dividend income was earned by the assessee, the same was offered for taxation.
6.7. Dealing with the scope of the proviso, it was submitted by the learned Counsel for the assessee that no assessment could be reopened relating to assessment prior to 1st April, 2001 i.e. prior to asst. yr. 2001-02. It was also contended by him that AO cannot reopen the assessment of any earlier year only for invoking the provisions under Section 14A. Thus, according to him, the reassessment for the purpose of Section 14A is not allowed and the AO is debarred in reopening the assessment of any year prior to asst. yr. 2001-02. According to him, the embargo is absolute.
6.8 Coming to the continuity of the proceedings it was submitted by the learned Counsel that the proviso to Section 14A which was introduced by the Finance Act, 2002 w.e.f. 11th May, 2001 provides that while completing the assessment relating to assessment year prior to asst. yr. 2001-02, if Section 14A was not invoked by the AO, then the same cannot be done by CIT(A) or by the Tribunal. The learned Counsel supported these arguments by making reference to the following decisions:
(1) Nauin Bharat Industries Ltd. v. Dy. CIT ITA No. 2201/Bom/1994; asst. yr. 1990-91, reported at (2005) 92 TTJ (Mumbai)(TM) 1166-Ed.;
(2) Hexa Securities & Finance Co. Ltd. ITA No. 2308/Del/2004 for asst. yr. 1999-2000;
(3) Paul John, Delicious Cashew Co. v. ITO (2005) 98 TTJ (Coch) 440;
(4) Escorts Finance Ltd. v. Dy. CIT (ITA No. 611/Del/2005 dt. 31st Aug., 2005).
6.9. He also distinguished the decision of Delhi Bench of the Tribunal in the case of Hexa Securities & Finance Co. Ltd. ITA No. 2308/Del/04(supra) by pointing out that in that case when the assessment Order was passed on 13th March, 2002, the provisions of Section 14A very much existed at that time but the AO had ignored the same. Therefore, the learned CIT treated the Order of the AO as erroneous and prejudicial to the interest of the Revenue whereas in the present case at the time of making the assessment, proviso to Section 14A was not there on the statute.
6.10. He also pointed out that there is only one judgment in favour of the Revenue i.e. in the case of Hexa Securities & Finance Co. Ltd. (supra) against three judgments of the Tribunal which are in favour of the assessee. The learned Counsel also made reference to various other authorities to show that legislative intent was to adopt a liberal construction so far as the beneficial provisions are concerned. By making reference to the decision reported in Virtual Soft Systems Ltd. v. CIT it was pointed out by him that a predominant view should be preferred and followed.
6.11. It was finally pointed out by the learned Counsel Shri Mehta that the assessee was not having any tax-free income in this assessment year and therefore there was no question for making disallowance under Section 14A. He also pointed out that no allegation was made by the AO that interest has to be paid for earning tax-free income nor any income was treated as exempt by him. For this purpose the learned Counsel for the assessee went through the assessment Order and the Order of the learned CIT(A) to demonstrate that in spite of the observations made by the AO and the learned CIT(A) no disallowance was made under Section 14A nor any query was raised in relation thereto. According to him, under these circumstances, how at the subsequent stage i.e. at the appellate stage such disallowance can be made by the Tribunal by invoking the provisions of Section 14A for the first time. In this regard and on the scope and powers of the Tribunal the learned Counsel made reference to the cases including the following authorities:
(a) Orissa Weavers Co-operative Spinning Mills Ltd. v. CIT ;
(b) CIT v. Princess Sarla Kumari and Anr. ;
(c) CIT v. Nanalal Tribhovandas and Anr. ;
(d) CIT v. Steel Cast Corporation ;
(e) Ugar Sugar Works Ltd. v. CIT .
7. The intervener filed written submissions. Shri P.F. Kaka, learned Counsel, appearing on behalf of the intervener, supported the arguments of the learned Counsel for the assessee by making detailed submissions. He made reference to amendment introduced in Section 14A of the IT Act and the proviso attached to Section 14A w.e.f. 11th May, 2001. Further, for tracing out the history relating to allow ability of interest and expenditure and to explain the legal position, in relation thereto, he referred the following decisions:
(1) CIT v. Indian Bank Ltd. (supra);
(2) CIT v. Industrial Investment Trust Co. Ltd." ;
(3) CIT v. Maharashtra Sugar Mills Ltd. ; and (4) Rajasthan State Warehousing Corporation v. CIT (supra).
7.1 The contention of the learned Counsel for the intervener was that assessee's income was not tax-free nor the assessee claimed any exemption from tax and therefore the assessee was not required to meet the test of Section 14A. It was submitted by the learned Counsel that the Tribunal cannot undertake the exercise when no claim is made by either of the parties nor any material is available on record. It was contended by him that the proviso is to be interpreted in a reasonable manner so as to make it workable. It was also submitted by him that when the provision of Section 14A came on the statute, it laid a heavy onus on the Revenue-(a) to invoke the provision of Section 14A; and (b) to satisfy the requirement of Section 14A. It was further submitted by him that legislature after realizing this difficulty and for making the task of the Revenue easier, introduced another amendment w.e.f. 1st April, 2007 to lay down guidelines but no such guidelines have been issued. The learned Counsel thereafter made reference to the circular of CBDT dt. 23rd July, 2001 and submitted that the circular says that anything done before the cut-off date should not be undone and therefore the circular is in tune with the proviso. In this regard the learned Counsel also gave an example by stating that in a case where the AO did not invoke Section 14A there may be two situations-(1) where the assessee does not file the appeal to challenge the addition relating to disallowance of expenditure; (2) where the assessee challenges the disallowance of interest. According to him, in the case of the assessee, who challenges the Order of the AO and CIT(A) invokes and applies Section 14A then such an assessee will be in worse position because in the case of assessee who has not preferred any appeal, by virtue of the proviso, the AO cannot reopen the assessment for invoking the provisions of Section 14A. According to learned Counsel this will create anomalous situation which will not be in consonance with the object of the legislature for introducing the provisions of Section 14A and the proviso to that section. In support of this contention, the learned Counsel placed reliance on the following authorities:
(i) ABN Amro Bank NV v. Jt. CIT (2005) 96 TTJ (Kol)(TM) 1041;
(ii) ITO v. Decca Survey Overseas Ltd. ITA No. 8489/Bom/1991;
(iii) ITO v. Decca Survey Overseas Ltd. ITA No. 3604/Bom/1994;
(iv) Chohung Bank v. Dy. Director of IT ITA No. 4948/Mum/2005, reported at (2006) 104 TTJ (Mumbai) 612-Ed.;
(v) Naveen Bharat Industries Ltd. v. Dy. CIT (supra).
7.2. He also made reference to the provisions contained under Section 43B and submitted that initially the provision contained under Section 43B was found to be a harassing provision and therefore subsequently a provision was introduced with prospective effect to mitigate hardship and to remedy hard effects of Section 43B. By making reference to the relevant provisions, he submitted that the only reasonable interpretation of the proviso is to make it workable and in tune with the object of the legislature. According to him in case question No. 1 is decided against the assessee then the consequence will be that although the AO does not have the power to disturb the assessment for asst. yr. 2001-02 and earlier assessment years but the appellate authorities will be doing so and under the Orders of such appellate authorities, including the Tribunal, while giving effect to their Orders, the AO will be doing the same thing and thus the effect of the proviso shall be nullified. This, according to him, will result in unintended consequences. According to him, the correct interpretation of the proviso will be that the assessment relating to period prior to 1st April, 2001 should remain undisturbed because if the AO is not permitted to undo the assessments completed prior to 1st April, 2001, then other authorities can also not be permitted to do the same. In support of this argument, he placed reliance on the decision in the case of CIT v. Gwalior Sugar Co. (P) Ltd. . The learned Counsel also pointed out that disallow ability of interest under Sections 36 and 37 is different from the disallow ability of interest under Section 14A of the IT Act and the Tribunal cannot put onus on the assessee to justify the expenditure because for disallowing the interest or expenditure in relation to the exempt income, the burden lies upon the Department and not upon the assessee. He also pointed out that in case the Tribunal adopts such course the result will be enhancement of income of the assessee which cannot be done' by the Tribunal and consequently for applying Section 14A on the facts and circumstances of the case since there is no material, the Tribunal will be completely handicapped to decide the matter and shall be compelled to remand the matter to the AO to consider again this issue which course is not permissible. Thus, his submission was that the Tribunal cannot confer the power on the AO which is not available to him under the statute in view of the proviso which is very specific. For supporting this submission he placed reliance on the decisions in the cases of. V. Uppalaiah v. Dy. CIT (2005) 95 TTJ (Hyd) 706 : (2005) 94 ITD 178 (Hyd); Narinder Singh Dhingra v. CIT ; CIT v. Rafiulla Tea & Industries (P) Ltd. and CIT v. Matrix Intel (P) Ltd. (2007) 294 ITR 257 (Mad). Coming to the powers of CIT(A) it was contended by him that powers of CIT(A) are coterminous with that of the AO and if the AO is barred in exercising jurisdiction, CIT(A) cannot exercise the same jurisdiction because what AO cannot do, CIT(A) can also not be allowed to do the same and since the jurisdiction of the AO has been taken away by the proviso, the same effect will be on the powers of the CIT(A) and even on the power of the Tribunal.
8. The learned CIT-Departmental Representative Shri Rajnish Kumar made very elaborate submissions for meeting out the contentions raised by the learned Counsel for the assessee and by the learned Counsel for the intervener. He also filed a written submission dt. 23rd April, 2007. In brief, the submission of the learned CIT-Departmental Representative, as given in the written arguments are as under:
1. The stand of the Revenue as regards question No. 1 is an unequivocal affirmative so far as the CIT(A) is concerned. The first appellate authority has well defined powers to resort to enhancement of the tax liability of an appellant before him. In respect of the issue under consideration of the Bench i.e. applicability of the provisions of Section 14A of the Act, the powers of the CIT(A) in this sphere would be circumscribed by the restriction put on the AO by virtue of the insertion of the proviso by the Finance Act, 2002 with retrospective date 11th May, 2001.
1.1 However, where the assessment Order passed prior to 11th May, 2001 is under challenge before CIT(A) having any claim of expenditure, being subject matter of dispute, he would be duty bound to examine the effect of Section 14A while deciding deductibility or otherwise of such an expenditure. In a case where the appeal is on some other point not involving any expenditure but the record shows that the appellant has certain income which do not form part of the total income and entire claim of expenditure stands allowed, the CIT(A) would be under obligation to examine the record from the view point of retrospective insertion of Section 14A.
1.2 Likewise, the CIT(A) would be duty bound to action some way, in respect of appeals relating to asst. yr. 2001-02 and earlier years, where assessment Orders were made after 11th May, 2001 without recourse to Section 14A of the Act.
2. So far as the Tribunal is concerned, it would be within its powers to invoke the provisions of Section 14A, provide the issue of deductibility of an expenditure, which also includes claim of expenditure relating to earning of exempted income which does not form part of the total income, is subject matter of appeal before it.
3. That if the law is amended so as to make it applicable retrospectively to any assessment year, the question at issue in respect of that year will have to be decided in light of the law as amended and it shall be so even if the matter is at the appellate, revision or reference stage. In support of this contention, reliance is placed by the learned CIT-Departmental Representative on the following authorities:
(i) CST v. Bijli Cotton Mills AIR 1965 SC 1594;
(ii) CIT v. Ashish Rattled Shah Kamla Section Asrani ;
(iii) CIT v. May & Baker (India)(P) Ltd. ;
(iv) CIT v. Dewan Bahadur Ramgopal Mills Ltd. ;
(v) CIT v. Smt. Eva Raha ;
(vi) National Agricultural Co-operative Marketing Federation of India Ltd. v. Union of India & Ors. ;
(vii) J.M. Bhatia, AAC v. J.M. Shah ;
(viii) CIT v. Devidayal Stainless Steel India (P) Ltd. ;
(ix) CIT v. Shah Electrical Corpn. ; and
(x) Asstt. CIT v. Shakti Builders (2005) 93 TTJ (Del) 425 : (2005) 93 ITD 269 (Del).
9. Regarding the scope of Section 14A, the submission of the learned CIT--departmental Representative was. that proviso to Section 14A was inserted w.e.f. 11th May, 2001 on which date the retrospective section came on the statute book. The proviso takes away the power of the AO in respect of any assessment year before 1st April, 2001, under various specific circumstances. These circumstances have been elaborated in the written submissions of the Department.
10. The powers of Tribunal are to dispose of any appeal before it. In such a clasp if the subject matter of appeal relates to the claim of deductibility of "expenditure, whether it is assessee's or Revenue's appeal even provisions JJFS. 14A are to be taken into account. For explaining the meaning of subject matter of appeal, the learned CIT-Departmental Representative placed reliance on the following authorities:
(a) Hukumchand Mills Ltd. v. CIT ;
(b) CIT v. Mahalaxmi Textile Mills Ltd. ;
(c) CIT v. P.B. Corporation (2004) 187 CTR (Guj) 212 : (2004) 266 ITR 548 (Guj).
The learned CIT-Departmental Representative also placed reliance on the following decisions on this point:
(i) B.R. Bamasi v. CIT ;
(ii) CIT v. Gilbert & Barkar Manufacturing Co. ;
(iii) CIT v. Edward Keventer (Succesors)(P) Ltd. ;
(iv) Marolia & Sons v. CIT ;
(v) N.P. Saraswathi Ammal v. CIT ;
(vi) CIT v. Om Prakash Bidhi Chand ;
(vii) Malayalam Plantations (India) Ltd. v. CIT ;
(viii) Travancore Chemical & Manufacturing Co. Ltd. v. CIT ;
(ix) CIT v. Smt. Section Vijayalakshmi ; and
(x) Shahid Atiq v. ITO (2005) 98 TTJ (Del) 971 : (2005) 97 ITD 22 (Del).
11. For controvert the argument of the learned Counsel for the assessee 'that by exercising its powers the Tribunal cannot put the assessee in adverse position, the learned Departmental Representative placed reliance on the following authorities:
(a) C.C.A.P. Ltd. v. CIT ;
(b) Jt. CIT v. Sakura Bank Ltd. (2006) 99 TTJ (Mumbai) 689 : (2006) 100 ITD 215 (Mumbai).
12. The learned CIT-Departmental Representative also submitted that in the instant case the assessment proceedings did not become final because the appeal was pending when Section 14A came into effect and since appeal is in continuation of the assessment proceedings the relevant amended provisions have to be given effect while deciding the appeal.
13. The learned Departmental Representative also submitted that the authorities on which reliance has been placed by the learned Counsel for the assessee are totally distinguishable en the facts of the present matter. In this regard, in particular, he made reference to the decision in the case of Maruti Udyog Ltd. v. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 ITD 119 (Del). He also submitted that the decision in the case of Navin Bharat Industries Ltd. v. Dy. CIT (supra) is also distinguishable because in that case the issue was regarding claim of expenses in relation to a business covered under Section 10A. Thereafter, the learned Departmental Representative placed reliance on the decision of Delhi Bench of the Tribunal in the case of Hexa Securities Ltd., (supra) in addition to the above authorities, for supporting the argument that proviso to Section 14A cannot curtail the powers of CIT(A) and the Tribunal and also on the scope of Section 14A, he placed reliance on the following authorities:
(a) CIT v. Rajendra Prasad Moody ;
(b) Asstt. CIT v. Citicorp Finance (India) Ltd. (2007) 111 TTJ (Mumbai) 82 : (2007) 12 SOT 248 (Mumbai).
In the paper book, filed with the written submissions, the learned CIT-Departmental Representative has also filed copies of the various decisions reference to which was made by him during the course of arguments before us.
14. We have carefully considered the entire material on record, the arguments raised on behalf of the assessee, on behalf of the intervener and on behalf of the Department. Before proceeding to deal with the questions referred to the Special Bench, we would consider it proper to deal with the scope of amendment introduced in Section 14A, the scope of proviso to that section inserted w.e.f. 11th May, 2001 and the scope of other relevant provisions, instructions of CBDT and the relevant case law relating to these provisions, because the controversy involved in various questions, referred to the Special Bench, centers around the scope of these provisions.
15. Section 14A inserted in Chapter IV under the caption "Computation of total income" is as under:
14A(1) For the purpose 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.
10.1 The proviso to this section reads as under:
Provided that nothing contained in this section shall empower the AO 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.
10.2 Sub-sections (2) and (3) were further added to Section 14A by the Finance Act, 2006 w.e.f. 1st April, 2007. These Sub-sections are as under:
(2) The AO 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 AO, 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.
10.3 After insertion of the proviso, the Board issued Circular No. 11 of 2001 dt. 23rd July, 2001 (2001) 169 CTR (St) 1, to explain the ambit and scope of the proviso. This circular is as under:
To All CCITs.
All DGITs.
Subject: Restriction on reopening of completed assessments on account of provisions of Section 14A--Clarification regarding.
Sir, The Finance Act, 2001, has inserted Section 14A in the IT Act, 1961, wherein it was specifically provided that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act. The amendment takes effect from 1st April, 1962.
Section 14A was introduced retrospectively in Order to clarify and state the position of law that any expenditure relatable to income which does not form part of total income cannot be set off against other taxable income. This section was not introduced with prospective effect, as that would have implied that before the introduction of the said provisions, expenditure incurred to earn exempt income was allowable.
Instances of reopening of old assessments, which had attained finality, after insertion of Section 14A in the Act, have come to the notice of the Board. Reopening of past completed assessments, having attained finality, on the basis of newly inserted provisions of Section 14A is likely to cause hardship to a large number of taxpayers and would result in increasing avoidable litigation.
The Board has considered this matter and hereby directs that the assessments where the proceedings have become final before the 1st day of April, 2001 should not be reopened under Section 147 of the Act to disallow expenditure incurred to earn exempt income by applying the provisions of newly inserted Section 14A of the Act.
This may be brought to the notice of all officers in your region immediately.
Yours faithfully, (Sd.) Rahul Navin, Under Secretary (TPL-I) 10.4 Vide Circular No. 8 of 2002 dt. 27th Aug., 2002 (2002) 178 CTR (St) 9, the Board further clarified the scope of amendment of Section 14A. The relevant portion of the circular is as under:
23.1 Through the Finance Act, 2001, a new section namely Section 14A was inserted in the IT Act retrospectively w.e.f. 1st April, 1962 to clarify the intention of the legislature that no deduction shall be allowed in respect of any expenditure incurred by an assessee in relation to income which does not form part of the total income under the IT Act. The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh.
23.2 Through the Finance Act, 2002, a proviso to Section 14A has been inserted so as to clarify that the AO shall not reassess the cases 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.
16. Now, we proceed to consider the submissions of the learned representatives of the parties made before us.
The submission of the learned Counsel for the assessee and that of the learned Counsel for the intervener was that in view of the proviso, no assessment could be reopened relating to assessment prior to asst. yr. 2001-02. According to them, this embargo is absolute. It was further contended by the learned Counsel for the assessee that if while completing the assessment relating to asst. yr. 2001-02 or earlier years, the provision of Section 14A was not invoked by the AO, then the same cannot be invoked by the learned CIT(A) or by the Tribunal because if the AO is debarred in taking certain action or is deprived of power in relation to certain process, then CIT(A) or the Tribunal cannot enable him to do so directly or indirectly. For supporting this contention, the learned Counsel for the assessee placed heavy reliance on the decision in the case of Paul John, Delicious Cashew Co. v. ITO (supra) and on the decision in the case of Escorts Finance Ltd. v. Dy. CIT rendered in ITA No. 611/Del/2005, dt. 31st Aug., 2005.
The submission of the learned Counsel for the intervener on the scope of Section 14A and proviso attached thereto was that after feeling the difficulty which arose on account of retrospective amendment introduced under Section 14A, the proviso was introduced to virtually make it prospective so that the assessees who had filed returns earlier may not be put to any disadvantageous position. In this regard the learned Counsel referred to the entire legislative history for introducing the proviso. It was pointed out by him that the proviso was introduced w.e.f. 11th May, 2001, on which date the assent of the President was obtained for amending Section 14A. The learned Counsel in this regard made reference to the Finance Bill, 2001 and the Notes on Clauses of this Bill. According to him, in view of the ratio of various decisions of apex Court regarding allowance of deduction for business expenses under Section 36 or 37 the aspect of taxability or non-taxability of income was not relevant. Thus in Order to do away with the impact of decisions of Hon'ble apex Court in the case of Indian Bank and Rajasthan Warehousing (supra), the proviso was introduced and further Sub-sections (2) and (3) were introduced w.e.f. 1st April, 2007 and now the provision contained under Section 14A is to be implemented as per the latest amendment introduced by the two sub-sections from 1st April, 2007.
13. The contention of the learned CIT-Departmental Representative on the other hand was that scope of proviso is very much limited and it cannot nullify or frustrate the object of the main provision contained under Section 14A.
The scope and applicability of retrospective amendment and Section 14A
17. For proper appraisal of the above referred arguments of learned representatives of the parties we have to examine the scope of retrospective and prospective legislation, particularly with reference to Section 14A and proviso attached thereto.
17.1 We have carefully considered the arguments of the learned/representatives of the parties and have also gone through all the relevant authorities cited by them in support of their respective contentions.
17.2 The scope of applicability of retrospectively amended provision has been elaborated by the Hon'ble Supreme Court in the case of CIT us. Straw Products Ltd. (1966) 60 ITR 156 (SC). In that case the respondent company had obtained certain concessions and facilities under an agreement with the Government of Bhopal dt. 30th Sept., 1938. Under the agreement the respondent was not required to file any return of income under the Bhopal IT Act. This period of ten years expired on 31st Oct., 1948. Later on Bhopal State merged in India on 1st Aug., 1949 and the ITO computed the written down value of the assets of the assessee as on 1st Jan., 1951, deducting there from the depreciation actually allowed till 31st Dec, 1950 and accordingly reduced the depreciation allowed in the original assessment. In appeal, the AAC restored the depreciation as computed in the original assessments. In second appeal, the Tribunal upheld the Order of AAC. Before the High Court, under reference, the question was as to whether, having regard to the provisions of para 2 of the Taxation Laws (Merged States)(Removal of Difficulties) Order, 1949, and Clause 8 of the agreement, the correct basis for computing the written down value of the depreciable assets was the one which was adopted by the ITO or the one adopted by the AAC. The High Court held that the correct basis was the one adopted by the AAC. Thereafter, on 20th April, 1962 para 2 of the Taxation Laws (Merged States)(Removal of Difficulties) Order, 1949, was amended and an Explanation was inserted. On appeal to Supreme Court, the Department relied upon the amended provision. The Hon'ble Supreme Court held that the answer to the reference was to be given in accordance with the amended law unless the question referred by the Tribunal was not couched in terms of sufficient amplitude to cover an inquiry into the question in the light of the amendment.
17.3 The Hon'ble Supreme Court while holding so, placed reliance on its Earlier decision in the case of CST v. Bijli Cotton Mills (supra). The observations made by Justice Shah, J. in that case, which have been quoted by the apex Court in its decision in the case of Straw Products Ltd. (supra), at p. 163 of the report, are as under:
Undoubtedly the Tribunal called upon to decide a taxing dispute must apply the relevant law applicable to a particular transaction to which the problem relates and that law normally is the law applicable as on the date on which the transaction in dispute has taken place. If the law which the Tribunal seeks to apply to the dispute is amended, so as to make the law applicable to the transaction in dispute, it would be bound to decide the question in the light of the law so amended. Similarly, when the question has been referred to the High Court and in the meanwhile the law has been amended with retrospective operation, it would be the duty of the High Court to apply the law so amended if it applies. By taking notice of the law which has been substituted for the original provision, the High Court is giving effect to legislative intent and does no more than what must be deemed to be necessarily implicit in the question referred by the Tribunal, provided the question is couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law, and the enquiry does not necessitate investigation of fresh facts. If the question is not so couched as to invite the High Court to decide the question in the light of the law as amended or if it necessitates investigation of facts which have not been investigated, the High Court may refuse to answer the question. Application of the relevant law to a problem raised by the reference before the High Court is not normally excluded merely because at the date when the Tribunal decided the question the relevant law was not or could not be brought to its notice.
17.4 In view of the above proposition laid down by the Hon'ble Supreme Court, it is clear that the amended law has to be given effect even by the appellate authorities and Courts, if the matter is pending before them. In view of this position, the amendment made with retrospective effect under Section 14A of IT Act has to be given effect by CIT(A) and Tribunal if the matter is heard by such authorities after the amendment has become operative.
17.5 In the case of CIT v. Ashish Ratilal Shah (supra) the Hon'ble "Bombay High Court has also considered the position regarding interpretation, of retrospective amendment made in law. It has been observed that when the law is amended with retrospective effect, the Court when it decides any proceedings, has to apply amended law retrospectively as if it were in force at the material time. In that case the Court has further observed that under both Sub-sections (1) and (2) of Section 256 of the IT Act, the High Court has to consider, whether a question of law arose from the Order of the Tribunal in appeal and when the reference is being decided, the High Court has to take into account any retrospective amendment of the law which may have taken place after the Tribunal's decision and during the pendency of the reference.
17.6 In the case of State of U.P. v. Modi Industries Ltd. . after decision in the reference by the High Court and before the Tribunal could act upon it, the law was amended retrospectively. The Tribunal, thereupon, did not act on the basis of the decision of the High Court under the reference. The assessee moved the High Court under Article 226 and the Hon'ble High Court viewed that the revising authority was not free to take a different view from the one expressed by the High Court on any ground whatsoever, including any subsequent amendment in the law and that it was bound to decide the case in conformity with the judgment of the High Court. On appeal, the Hon'ble Supreme Court set aside the decision of the High Court by holding that the retrospective amendment clearly indicated the intention of the legislature of restoring the assessments and Orders made earlier and hence the Tribunal was entitled to take such retrospective amendment into account.
17.7 In the case of CIT v. May & Baker (India)(P) Ltd. (supra), while answering the reference on the basis of old law, the Hon'ble Bombay High Court cautioned the Tribunal to take into account the retrospectively amended provision while passing final Order in the appeal.
In the case of CIT v. Smt. Eva Raha (supra), the Hon'ble Guwahati High Court has observed as under:
Therefore, in the instant case, the Orders which had been rendered by the Tribunal, were good and valid when they were so rendered. But the Orders so rendered are patently invalid and wrong by virtue of the retrospective operation of the Amendment Act. Therefore, when the application for rectification was made within the period of limitation prescribed under Section 254(2) of the Act as a result of the retrospective operation of the Amendment Act, the conclusion is now inescapable that the Order in question is inconsistent with the provision of the Amended Act and 'must be deemed to suffer from a mistake apparent from the record' and that is why the applications for rectification ought to have been entertained and disposed of by the Tribunal. The Tribunal has power under Section 254(2) to rectify the mistake.
17.8 The issue was also considered by the Hon'ble Supreme Court in the case of Ujagar Prints v. Union of India . In that case the Hon'ble Supreme Court held that a competent legislature can always validate a law which has been declared by Courts to be invalid and such valid law can also be made retrospective.
17.9 The same view has been expressed in the following cases:
(i) Asstt. CIT v. Shakti Builders (supra);
(ii) J.M. Bhatia, AAC v. J.M. Shah (supra);
(iii) CIT v. Devidayal Stainless Steel (supra); and
(iv) CIT v. Shah Electrical Corp. (supra).
In view of the above mentioned authorities, there remains no doubt that Section 14A has to be applied retrospectively by all the Courts before whom the proceedings are pending i.e., if the issue is related to the subject matter pertaining to deduction of expenses in relation to exempt income, then such issue has to be decided by taking cognizance of the amended law. The learned Counsel for the assessee has not been able to point out any authority to the effect that while deciding the matter the amended law existing at the time of pendency of such matter can be ignored. Thus, in our opinion the amendment made retrospectively has to be given full effect and has to be applied by all authorities including Tribunal, if the facts involve the issue warranting application of the amended law as contained under Section 14A of the IT Act.
Scope and ambit of proviso attached to Section 14A
18. The settled legal position is that the normal functioning of a proviso is to except something from the enactment or to qualify something enacted thereto but the proviso would be within the purview of the enactment.
19. In the case of Mullins v. Treasurer of Survey (1980) 5 QBD 170 at p. 173, the learned Lush, J., observed that "when one finds a proviso to a section the natural presumption is that, but for the proviso, the enactment part of the section would have included the subject matter of the proviso". In the words of Lord Macmillan expressed in the case of Local Government Board v. South Stoneham Union (1909) AC 57 p. 62 (HL), the proviso may be a qualification of the preceding enactment, which is expressed in terms too general to be quite accurate. Hon'ble Mr. Justice Hidayatulla has expressed this Rule in the case of Shah Bhojraj Kuverji Oil Mills & Ginning Factory v. Subhash Chandra Yograj Sinha in the following words:
As a general Rule, a proviso is added to an enactment to qualify or create top exception to what is in the enactment, and ordinarily, a proviso is not interpreted as stating a general Rule.
20. In the case of CIT v. Indo Mercantile Bank Ltd. , the Hon'ble Mr. Justice Kapur, has also made the following observations regarding the scope of proviso:
The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment.
21. It has been laid down by the Courts that a proviso is not normally construed as nullifying the enactment or as taking away completely a right conferred by the enactment. In the case of Section Sundaram Pillai v. Pattabhiraman , it has been observed by the Hon'ble Supreme Court as under:
To sum up a proviso may serve four different purposes:
(1) Qualifying or excepting certain provisions from the main enactment;
(2) It may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in Order to make the enactment workable.
(3) It may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantiate enactment itself; and (4) It may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.
22. In view of the above propositions and Rules, we have to give effect to the provision and proviso both. In our considered opinion, the terminology adopted in the provision and in the proviso does not lead to any inconsistency because the words expressed therein convey the plain meaning where the language used in a proviso is quite clear and no ambiguity is found, it would be futile to go into the question whether the proviso operates as a substantive provision or only by way of exception and hence the plain meaning must be adopted.
23. In the light of propositions, set out above, we consider the scope of the proviso to Section 14A which was inserted w.e.f. 11th May, 2001. We have already reproduced the relevant proviso and also the circular letters of the CBDT clarifying the position. The terminology and the language adopted in the proviso is very clear. According to the settled Rule of literal construction, if the meaning of any statutory provision is plain and clear, then effect has to be given to the terminology used therein. Thus, as per its plain meaning, what the proviso protects is the pre-existing assessment Orders and deprives the AO to unsettle the same by taking recourse to the provisions contained under Section 147 or 154. The proviso therefore, excludes the jurisdiction of AO to reassess the income or to rectify the assessment upto asst. yr. 2001-02, so far as Section 14A is concerned.
24. The contention of the learned Counsel for the assessee that since under the proviso, the AO has been deprived of making the reassessment or in amending the assessment already made, the CIT(A) and Tribunal can also not do anything to empower the AO to do the same act, the doing of which is prohibited by the proviso, cannot be accepted. The language adopted in the proviso is very specific. Only reassessment under Section 147 and only amendments/rectification of the assessments already made has been debarred. There are several authorities under the IT Act who derive their powers from various other statutory provisions. For example, the CIT has power under Section 263 to modify or enhance the assessment made by the AO. Thus, since the power of CIT under Section 263 has not been excluded, in our opinion, by adopting the logic that if power under Section 263 is exercised in relation to the past assessments which have been finalized, the effect would be that the AO will be redoing the whole thing and thus in effect, the effect of proviso shall be nullified, cannot be accepted. It was so held in the case of Hexa Securities & Finance Co. Ltd. by the Tribunal, Delhi Bench 'D' vide its Order dt. 30th Nov., 2006 rendered in ITA No. 2308/Del/2000. Similarly, the power of CIT(A) and those of Tribunal can also not be curtailed. The proviso has to be construed strictly as it has got the effect of curtailing the ambit and operation of the main provision only to a limited extent. It cannot nullify the whole of the provision. Thus, if the proviso is given wider effect than intended by the legislature, then it would frustrate the object of the amendment of Section 14A which has been introduced intentionally with retrospective effect by the legislature.
Harmonious construction of Section 14A and the proviso attached to it
25. We have considered the scope and ambit of retrospectively amended provisions as contained in Section 14A and have also considered the ambit and scope of the prospective provision as contained in the proviso attached to it. For doing so, we have considered these provisions separately. However, in Order to properly construing these two provisions together so as to give the required effect to each of the provision, a harmonious construction of these provisions is necessary for avoiding the consequences of rendering one provision totally ineffective at the cost of giving effect to the other. For this purpose, we have to gather the intention of the legislature as well as the purpose and object behind the enactment of the main provision i.e. Section 14A and proviso subsequently inserted for partly controlling its effect or delimiting its scope.
25.1. It is commonly known that a statute is an edict of the legislature and the conventional way of interpreting or construing a statute is to seek the intention of its maker. In the case of RMD Chamarbaugwala v. Union of India , the Hon'ble Supreme Court has observed that, "a statute is to be construed according to the intent of them that make it and the duty of the judicature is to act upon the true intention of the legislature--'the mens or sentential legis'. The intention of the legislature assumes two aspects i.e. in one aspect it carries the concept of meaning i.e. what the words mean and in another aspect, it conveys the concept of purpose and object or the reason and spirit prevailing through the statute. The process of construction, therefore, combines both literal and purposive approaches. In other words, the legislative intention i.e. the true or legal meaning of an enactment is derived by considering the meaning of the words used in the enactment in the light of any discernible purpose or object which comprehends the mischief and its remedy to which the enactment is directed. This Rule of construction has been termed as the cardinal principle of construction by the Hon'ble Supreme Court of India in the case of Union of India v. Elphinstone Spg. & Wvg. Co. Ltd. .
26. On the basis of the above Rule of construction, we have to see the -intention of the legislature in the context of object behind legislating the two provisions properly. For this purpose, firstly the history of legislature assumes significant role because it is to be seen as to what was the mischief requiring to be cured for enacting the provision and what was the purpose for enacting the same. Prior to the insertion of Section 14A, the only requirement for allowing the deduction of expenditure under Sections 36 and 37 of the IT Act was to see as to whether the expenditure was incurred 'for the purpose of business'. Under Sections 56 and 57 of the IT Act, the requirement was to see as to whether the expenses were incurred for earning profits or gains of 'income from other sources'. Even the expenditure incurred for income exempted from tax was allowable if these requirements were satisfied. The legislature, therefore, wanted to introduce another test i.e. if the income itself is' not part of the total income then the expenditure relating thereto should not be allowed. With this object, Section 14A was introduced. As the amendment was retrospective, it was apprehended that in view of the provision contained under the amended law, all the concluded matters even prior to the introduction of the proviso i.e. prior to asst. yr. 2001-02 may be reopened by taking recourse to reassessment proceedings or rectification process. The legislature therefore wanted to curb this mischief and with, this object and aim, the proviso to Section 14A was added. The proviso as per its very nature controlled the effect of the main provision by providing that if assessments for asst. yr. 2001-02 and earlier years were completed and the issue stood concluded then the same shall not be disturbed. However, the restriction imposed by the proviso was not absolute. The power of AO was curtailed and he was debarred in making reassessment or in amending the assessment Orders passed for assessment years prior to asst. yr. 2001-02, but if the proceedings were continuing in relation to such assessment years and the assessments were not concluded then the issue was to be decided as per the amended provision and the proviso could not restrict the operation of the main provision so as to require a forum dealing with the matter, not to give effect to the amended law or not to take cognizance of the same if the issue related to the subject covered under the main provision as contained under Section 14A. The real controversy therefore centers around the point as to in what manner the two provisions should be construed so as to avoid the consequence of rendering one provision as redundant or nugatory in giving life and effect to the other. In such a situation and for resolving such controversies, the best Rule of construction of statutory provision is to take recourse to harmonious construction, which requires that the two provisions should be construed harmoniously so that both can be given effect according to the desired legislative intention and also to fulfill the object behind their enactment. It has been observed by the Courts that a statute must be read as a whole and one provision of the Act should be construed with reference to other provisions of the same Act so as to make a consistent enactment of the whole statute. Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a section and other parts of the statute. In the case of Raj Krushna v. Binod Kanungo , the Hon'ble Supreme Court has observed that "it is the duty of the Courts to avoid 'a head on clash' between two sections of the same Act and whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise".
27. In the case of Dormer v. Newcastle-on-Tyne Corpn. (1940) 2 All ER 521, it was observed that it should not be lightly assumed that Parliament has given with one hand what it took away with the other.
As observed by us, while dealing with the main provision of Section 14A, the law was amended retrospectively. The intention of the legislature in amending the law retrospectively is clearly expressed in the words used in the provision. It is a settled law that if the intention is manifest by express words or necessary implication, then such intention is to be geven effect to.
28. It may be pointed out that no authority has been brought to our notice according to which the retrospective amendment introduced through Section 14A is invalid or is not aimed at carrying out the object behind it. The arguments of the learned Counsel for the assessee was that in view of the proviso, the amendment as introduced in Section 14A will debar all the authorities in disturbing the assessments of asst. yr. 2001-02 and earlier years through any course in any manner on the ground that the proviso intends so, cannot be accepted because if such an approach is adopted then the retrospectively of the amended provision as contained under Section 14A shall be rendered ineffective.
29. Thus, according to the principle of harmonious construction as elaborated above and after considering the plain meaning of the provision and the proviso, it is quite clear that both have to be applied in their respective fields. The proviso only restrains the AO from invoking the provisions of Sections 147 and 154. This restriction cannot be stretched too far and has to be confined to the area which it covers. That appears to be the intention of the legislature. If the restriction was to be applied to other areas and was to cover other authorities for curtailing their powers, the same could have been specifically provided. The proviso does not talk of restricting the power of CIT(A) or Tribunal. Hence, powers of these authorities are to be exercised as per the provisions of the IT Act and no restriction can be inferred from the proviso. The consequence theory as propounded in the arguments of the learned Counsel of the assessee and those of the intervener also cannot be accepted because then indirectly the proviso will affect the powers of higher authorities. Under the IT Act, the powers of AO are well defined. These powers include power of reassessment and rectification. Only these two powers cannot be exercised by the AO in relation to the completed assessments for asst. yr. 2001-02 and earlier years. However, in relation to such years also if assessments are not completed or concluded, the proviso will not come in the way and the provision as contained in Section 14A, will be given effect because no authority can ignore the law prevailing at the time when the matter is being considered and decided.
30. In the instant case, since the proceedings are pending before Tribunal, which is to be regarded as continuation of assessment proceedings as held in the case of CJT v. Mayur Foundation , it cannot be said that the assessment stands concluded and therefore the proviso will bar the Tribunal in giving effect to the provisions as contained under Section 14A.
31. In view of the above, it is clear that proviso imposes restriction on the main provision and it clarifies its scope by excluding the powers of the AO to make reassessment under Section 147 or to rectify the assessment under Section 154 of the IT Act. It cannot totally nullify the main provision. In view of this construction of the two provisions i.e., Section 14A and the proviso, the contention of the learned Counsel for the assessee that the operation of the main provision stands excluded upto the asst. yr. 2001-02, even though made retrospective from 1st April, 1962 cannot be accepted because such an interpretation would lead to absurdity as it would not only negate the retrospective effect of the main provision contained under Section 14A but shall render it totally nugatory.
Powers of Tribunal
32. Now we proceed to consider the power of Tribunal. In view of the provisions contained under Section 254(1), the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such Orders thereon as it thinks fit. The term "thereon" also appears under the old Section 33, which provision is as under:
33(4) The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such Orders thereon as it thinks fit, and shall communicate any such Orders to the assessee and to the CIT.
33. The apex Court considered the matter in detail and explained the Entire scope of appeal before the Tribunal and its powers in the case of Hukumchand Mills Ltd. v. CIT (supra). The Hon'ble Court made the following observations:
Civil Appeals Nos. 411 to 413 of 1965 : The sole question argued on behalf of the assessee in these appeals is that the Tribunal was not competent to go into the question whether the provisions of para 2 of the Taxation Laws Orders were applicable to the present case and the respondent should not have been allowed to raise the contention for the first time before the Tribunal. It was also argued that the Tribunal ought not to have remanded the case to the ITO for ascertaining whether any depreciation was allowed under the Industrial Tax Rules and whether such depreciation should be taken into account for the purpose of computing the written down value. In our opinion there is no justification for this argument. In the first place, no objection was raised before the Tribunal or before the High Court that the Department should not have been allowed to raise the question for the first time with regard to the application of para 2 of the Taxation Laws Order. We shall, however, assume in favour of the assessee that the question was implicit in the question actually framed and referred to the High Court. Even upon that assumption we are of opinion that the Tribunal had jurisdiction to permit the question to be raised for the first time in appeal. The powers of the Tribunal in dealing with appeals are expressed in Section 33(4) of the Act in the widest possible terms. Section 33(3) of the Act states that 'an appeal to the Tribunal shall be in the prescribed form and shall be verified in the prescribed manner Section 33(4) reads as follows:
33(4) The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such Orders thereon as it thinks fit, and shall communicate any such Orders to the assessee and to the CIT.
34. In view of the above decision, the term "thereon" restricts the jurisdiction of the Tribunal to the subject matter of the appeal. The words, "pass such Orders as it thinks fit" include all the powers which are conferred on the Departmental authorities except the power of enhancement. Consequently, the Tribunal has authority under this section to direct the AAC or the ITO to hold further inquiry or to dispose of the matter on the basis of such inquiry.
35. Rules 12, 27 and 28 of the Tribunal Rules also deal with the power of the Tribunal and the procedure to be adopted by it. These Rules are as under:
12. The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this Rule:
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.
Rule 27: The respondent, though he may not have appealed, may support the Order appealed against on any of the grounds decided against him.
Rule 28: Where the Tribunal is of the opinion that the case should be remanded, it may remand it to the authority from whose Order the appeal has been preferred or to the ITO, with such directions as the Tribunal may think fit.
36. The Hon'ble Supreme Court in the case of Hukumchand Mills (supra) after making reference to the above Rules and after considering the detailed facts of that case has observed as under:
In the present case, the subject matter of the appeal before the Tribunal was the question as to what should be the proper written down value of the buildings, machinery, etc., of the assessee for calculating the depreciation allowance under Section 10(2)(vi) of the Act. It was certainly open to the Department, in the appeal filed by the assessee before the Tribunal, to support the finding of the AAC with regard to the written down value on any of the grounds decided against it. It was argued on behalf of the appellant that the action of the Tribunal in remanding the case is not strictly justified by the language of Rule 27 or Rule 12. Even assuming that Rules 12 and 27 are not strictly applicable, we are of opinion that the Tribunal has got sufficient power under Section 33(4) of the Act to entertain the argument of the Department with regard to the application of para 2 of the Taxation Laws Order and remand the case to the ITO in the manner it has done. It is necessary to state that Rules 12 and 27 are not exhaustive of the powers of the Tribunal.
The Rules are merely procedural in character and do not, in anyway, circumscribe or control the power of the Tribunal under Section 33(4) of the Act. We are accordingly of the opinion that the Tribunal had jurisdiction to entertain the argument of the Department in this case and to direct the ITO to find whether any depreciation was actually allowed under the Industrial Tax Rules and whether such depreciation should be taken into consideration for the purpose of computing the written down value.
37. In the case of CAT v. Mahalaxmi Textile Mills Ltd. (supra), the Hon'ble apex court has held that the Tribunal, which has wide powers in respect of the subject matter of an appeal before it, can decide any question which is "material to the subject matter" even though it was riot raised by the parties to the appeal.
In the case of CIT v. P.B. Corporation (supra), the Hon'ble Gujarat "High Court has gone to the extent of saying that the powers available to the appellate Court under Order 41 Rule 33 of the CPC, are also available to the Tribunal. In this case the following observations have been made by the Hon'ble Mr. Justice M.S. Shah, J, who delivered the judgment:
M.S. Shah, J.--In this reference at the instance of the Revenue, the following question is referred for our opinion in respect of the asst. yrs. 1979-80 to 1983-84:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in resorting the matter to the AAC for fresh decision of the appeals when the assessee had not filed any appeal against the additions which have been sustained by the AAC?'....
At this stage, we may also note the provisions of Order 41, Rule 33 of the CPC, which read as under:
'33. Power of Court of appeal.--The appellate Court shall have power to pass any decree and make any Order which ought to have been passed or made and to pass or make such further or other decree or Order as the case may require, and this power may be exercised by the Court notwithstanding that the appeal is as to part only of the decree and may be exercised in favour of all or any of the respondents or parties, although such respondents or parties may not have filed any appeal or objection and may, where there have been decrees in cross-suits or where two or more decrees are passed on one suit, be exercised in respect of all or any of the decrees, although an appeal may not have been filed against such decrees:
Provided that the appellate Court shall not make any Order under Section 35A in pursuance of any objection of which the Court from whose decree the appeal is preferred has omitted or refused to make such Order'.
...It is clear that the appellate Court can pass appropriate Orders and the appellate powers may be exercised in favour of all or any of the respondents or parties, although such respondents or parties may not have filed any appeal or objection against the Order giving rise to the appeal.
Apart from the fact that the provisions of Section 254(1) confer very wide powers on the Tribunal, there is nothing in the provisions of the IT Act which would have the effect of nullifying the provisions of Order 41. Rule 33 of the CPC, or the principle underlying the said provision that the appellate Court may pass such Order or decree as the case may require and this would also include passing Orders in favour of any of the respondents although such a respondent may not have filed any appeal or objection.
In the facts of the instant case, the AO exercised powers under the provisions of Section 144 because the notices under Sections 142(1) and 143(2) of the IT Act were not complied with by the assessee and the ITO substantially enhanced the assessment for the concerned five years. Once the Tribunal found that there was no warrant for assessing the income at the particular amounts mentioned hereinabove, it was but natural that the entire matter was required to be kept at large and to permit the parties to lead evidence. In this set of circumstances, the assessee could not have been tied down to the amounts assessed by the AAC and the Tribunal, therefore, rightly set aside the assessment Orders passed by the AAC as well....
38. In view of the above, the argument of the learned Counsel for the assessee that the Tribunal cannot suo motu consider an issue which has not been considered by the lower authorities or which has not been raised by the parties before it, is not acceptable. If the subject matter of appeal or any ground of appeal includes an issue which requires proper adjudication then for deciding such subject matter or any other issue relatable to such subject matter, the Tribunal can exercise its power under Section 254(1). The only condition is that the affected parties must be given full opportunity of being heard.
On the basis of the discussion made above, in relation to the scope of retrospectively amended provision, as contained under Section 14A and on the scope of the proviso to that section and also on the basis of discussion made with respect to the powers of the Tribunal, as referred to above, we proceed to decide and answer question No. 1 as under.
After considering the legal position in relation to Section 14A and proviso attached thereto, we cull out the following propositions on the scope, ambit and applicability of the provision contained under Section 14A and the proviso as inserted w.e.f. 11th May, 2001.
Powers of the AO
39. Although in view of the questions framed for our consideration, we are not required to deal with the powers of the AO, however, as the questions referred to us, which involve the examination of the provisions of Section 14A and proviso attached thereto and which control the powers of AO, in that context, we would like to make some observations relating to the powers of AO also.
(i) That the AO is not entitled to make reassessment of concluded assessments or to amend the assessment Orders by taking recourse to rectification process under Section 154 relating to assessments prior to asst. yr. 2001-02 and earlier assessment years by invoking the provisions of Section 14A of the IT Act.
(ii) If assessments for the asst. yr. 2001-02 and earlier years have not been concluded and are pending before the AO then he shall give effect to the amended law by invoking Section 14A if any issue relating to allow ability of deduction in relation to exempt income arises before him.
(iii) The AO is not debarred in invoking Section 14A if the CIT(A) or Tribunal gives a direction to him for doing so i.e. if for carrying out the direction of appellate Courts, the invoking of Section 14A becomes necessary then the restriction imposed by the proviso to Section 14A will not restrain him from applying amended provisions of Section 14A.
(iv) Where an assessment Order for asst. yr. 2001-02 or for earlier years on the issue of deductibility of any expenditure has been set aside under Section 263 of the IT Act for fresh adjudication, the AO shall not be debarred from invoking Section 14A if the application of Section 14A becomes necessary.
40. The CIT(A) can invoke the provisions of Section 14A under following 'circumstances:
(i) When the matter relating to asst. yr. 2001-02 or earlier years is pending before the CIT(A) and the amended provision is applicable then the amended provision cannot be ignored if the subject matter pending for consideration before such appellate authority involves the issue requiring adjudication by applying Section 14A.
(ii) When the facts placed before him at the appellate stage involve the issue relating to the applicability of Section 14A, then he can invoke Section 14A, even if the AO had not invoked Section 14A, because such provision was not in existence at the time of passing the assessment Order.
41. The Tribunal shall have the power to invoke the provisions as contained in Section 14A inter alia in the following situations:
(a) Where the assessment proceedings pertaining to asst. yr. 2001-02 and earlier years have not been concluded or finalized and the matter is pending before Tribunal involving the issue relating to deduction of expenses which also includes expenses incurred in relation to the exempt income.
(b) The Tribunal can consider the issue relating to applicability of Section 14A in relation to asst. yr. 2001-02 and earlier years either when a ground is taken before it by any of the party or even suo motu if the issue arising before it requires adjudication by making reference to Section 14A and the proviso attached thereto irrespective of the fact that Section 14A was not invoked, by any of the lower authorities.
42. In above circumstances, Tribunal and CIT(A) can invoke the provisions of Section 14A for deciding the issue in the proceedings pending before such authorities. Question No. 1 is answered in affirmative and in favour of the Revenue.
Question No. 2: Since we have decided question No. 1 in positive terms, the answer to question No. 2 is covered by our findings on question No. 1. Hence, this question is decided accordingly.
43. Question No. 3: We will deal with the two cases in the following manner:
I. Navin Bharat Industries Ltd. (ITA No. 220/Bom/1994, asst. yr. 1990-91) Facts of this case are as under:
43.1 The assessee company established an undertaking at an export processing zone (SEEPZ), which was a free trade zone within the meaning of Section 10A. The assessee claimed benefit of Section 10A for the first three assessment years viz. 1982-83, 1988-89 and 1989-90. The benefit was available for a period of 5 years. In asst. yr. 1990-91 the assessee incurred a loss in respect of the said undertaking. The loss was adjusted against profits of some other units. The AO disallowed the loss and held that as profits of SEEPZ units were not taxable, loss could not be allowed. On appeal, the learned CIT(A) confirmed the action of the AO.
The assessee took various grounds to challenge the decision of the 'learned CIT(A) before the Tribunal. Ground No. 4 as taken was as under:
The learned CIT(A) erred in upholding the action of the AO of not setting off the loss incurred by the SEPZ unit entitled for deduction under Section 10A against the other business income of the appellant without properly appreciating the provisions of Section 10A of the IT Act and the purpose for which the said deduction has been allowed.
43.2 A query was raised by the Bench during the course of hearing regarding the applicability of Section 14A. The submission of the learned Counsel for the assessee was that Section 14A was applicable only in respect of the "expenditure incurred" in respect of income which is not includible in the total income and does not deal with the losses from that source. The learned Departmental Representative on the other hand submitted that amendment introduced under Section 14A brought on statute book, is effective from 1st April, 1962.
43.3 The learned AM held that the Tribunal cannot use that provision to disallow something by making use of the same. The findings of learned AM as contained in para 25 of the Order are as under:
25. Coming to Section 14A relied upon by the learned Departmental Representative, we find that even though Section 14A has been given retrospective effect w.e.f. 1st April, 1962, the operation of the section has been made prospective. This was also clarified by the Circular No. 11 of 2001, dt. 23rd July, 2001 (2001) 169 CTR (St) 1. According to the circular, the AO should not reopen the assessments to disallow the expenditure to earn the exempt income by applying the provisions of newly inserted Section 14A of the Act. Further, in Order to avoid the controversy as to whether the circular would be binding or not, the amendment was made in Section 14A by inserting the proviso which reads as under:
Provided that nothing contained in this section shall empower the AO 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 of April, 2001.
43.4 The learned JM on the other hand took a different view which is as under:
In my view according to the provisions of Section 14A the claim of the assessee is not admissible. Proviso to the above section deals with the situation where assessment has got finality. In the present case addition was made by AO and has been upheld by the CIT(A). The appeal is pending before Tribunal, therefore, the issue is alive. Proviso to Section 14A is applicable to a situation where the assessment has got finality and on such assessment provisions of Section 147 or 154 cannot be made applicable. In my view the provision of Section 14A is applicable to the case of assessee and the loss claimed is inadmissible. The Tribunal is duty bound to consider the provisions which is on the statute. The provisions of Section 14A has been brought into statute with retrospective effect from 1st April, 1962 and covers the period under consideration. Therefore, in my view tm claim of the assessee has to be rejected.
43.5 On difference of opinion of two Members, on this issue, the learned Third Member after referring to the relevant provisions and the relevant circulars of CBDT observed as under:
15. The learned JM did not discuss the applicability of Section 14A of the Act, vis-a-vis the facts of the present case. It was presumed that this section applies to the case of the, assessee and as because it was made operative retrospectively; as such it was applied. Therefore, it is necessary to examine firstly whether Section 14A of the Act can be applied in the facts and circumstances of the present case. Subject to its applicability, the question apropos to its retrospective applicability would be pertinent for deciding this issue.
16. Section 14A reads as under:
Expenditure Incurred in relation to income not includible in total income.-- 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.
17. This section puts restriction on the allow ability of expenditure. Can this restriction be extended to loss also? Whether loss could be construed to be expenditure? Are some of the questions, which need to be examined.
18. 'Spending' in the sense of paying out or away of money is the primary meaning of 'expenditure'. 'Expenditure' is what is paid out or away and is something which is gone irretrievably. Expenditure relates to disbursements; that means something that a trader paid out indicating a sort of volition on his part. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A 'loss' is something different. That is not a thing, which he expends or disburses. That is a thing, which comes upon him ab extra. Business expenditure is allowable if it is laid out or expended wholly and exclusively for the assessee's business, while a business loss is allowable if it is of non capital nature and is not only connected with the trade but is incidental to the trade itself. In assessing the amount of profits and gains of a year, account must necessarily be taken of all losses incurred, besides the expenditure allowable under Sections 30 to 44D of the Act. This view is buttressed by the decision of the apex Court rendered in the case of CIT v. S.C. Kothari . Therefore, loss could not be construed to be expenditure. Section 14A of the Act is applicable qua the expenditure and not qua the loss'.
On going through the above observations of the learned Third Member, it is clear that the issue was not adjudicated after examining the applicability of Section 14A and the proviso attached to it, rather it was held that on the facts of that case, the issue was not about the allow ability of the expenditure but was about the loss and since "loss" is different from "expenditure", Section 14A is not applicable to loss.
43.6 After considering the scope of Section 10A and after deciding the issue, in the last, the learned Third Member has also observed as under:
In view of this finding, the question whether Section 14A of the Act is prospective or retrospective in operation, has become academic.
The above sentence also indicates that the learned Third Member did not go into the relevant aspects of the issue relating to the scope and ambit of Section 14A and the proviso attached thereto.
In our view, therefore, this decision is distinguishable, firstly Cause on facts, it was found that Section 14A is not applicable to the cases where loss is claimed and secondly because after adjudicating the main issue in view of the provisions contained under Section 10A, the learned Third Member, though concurred with the learned AM, but did not himself finally express any opinion on the scope and applicability of Section 14A.
43.7 Hence, in our view, the decision is distinguishable on facts from "fine facts of the instant matter and therefore the same is not applicable to the facts of the present case.
II. The decision in the case of Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/2004) The facts relating to this matter are as under:
44. The assessment under Section 143(3) was completed on 13th March, 2002 in the case of the assessee. The matter pertained to asst. yr. 1999-2000. The total receipts of the assessee company amounting to Rs. 23,87,458 included a sum of Rs. 23,15,802, which was dividend income and balance of Rs. 71,656 was interest received. The AO did not consider the provisions of Section 14A and did not disallow the proportionate expenditure attributable to dividend income, which was not includible in the total taxable income. The CIT invoked the power under Section 263 by holding that the Order of the AO was erroneous and prejudicial to the interest of the Revenue because the AO ignored the provisions of Section 14A, which existed on statute at the time when he was making the assessment and which provisions were attracted in the matter. The assessee had filed appeal before the learned CIT(A) against the assessment Order and a further appeal before Tribunal, which was decided. On these facts, the contention of the assessee for challenging the Order of CIT under Section 263 was that since the assessment proceedings had been completed and concluded by the Order of Tribunal, in view of the proviso attached to Section 14A, the CIT was not empowered to direct the AO to apply the provisions of Section 14A by passing Order under Section 263. The main contention of the Revenue was that the proviso only debars the AO from exercising power under Sections 147 and 154 in relation to completed assessments relating to asst. yr. 2001-02 and earlier years and that the proviso does not debar the CIT from exercising power under Section 263.
45. The Tribunal accepted this contention and upheld the Order of CIT(A) passed under Section 263 by observing as under:
25. On carefully going through the proviso to Section 14A, we find that in fact the legislature never intended to restrict the reversionary powers of CIT under Section 263 or the powers of appellate authorities already conferred on them under the statute in considering the provisions of Section 14A while considering the matters, which come up for consideration before them otherwise, the legislature could have also included their names along with the AO in restricting their powers. Since in the proviso to Section 14A of the Act the Section 263 has been omitted it means that the revisional powers of CIT under Section 263 have not been included under proviso below Section 14A of the Act.
46. Now again reverting to uncontroversial facts we find that in the instant case the assessment under Section 143(3) was framed by the AO on 13th March, 2002. The Section 14A had already been inserted by the Finance Act, 2001 w.e.f. 1st April, 1962. The assessee has earned dividend income of Rs. 23,15,802. As per Section 10(33) of the Act the income from dividend was exempt, therefore, as per Section 14A deduction in respect of expenditure in relation to exempted income, which does not form part of total taxable income, was not allowable. It means while framing the assessment the AO was duty bound to take note of the abovementioned statutory provisions for coming to a conclusion that the expenditure, which was attributable to the dividend income was not includible in the total taxable income and hence not allowable. Since the AO has not done so while framing the assessment under Section 143(3) the Order of the AO was erroneous as well as prejudicial to the interest of the Revenue.
47. Now, in these facts we are not required to consider whether the proviso to Section 14A restricts the powers of AO under Sections 147 and 154 for reopening/rectifying the assessment Order already framed by him as in this case the CIT has used his jurisdiction under Section 263 because the AO was duty bound to consider the provisions of Section 14A at the time of framing the assessment but he failed to do so. Hence, the insertion of proviso to Section 14A in the statute is of no significance in the facts and circumstances of the case of the assessee. For the reasons stated above, we are of the clear view that neither the proviso to Section 14A is relevant in the instant case nor the restrictions imposed upon the AO by the proviso have any effect on the powers of CIT conferred under Section 263 of the Act.
28. We have already held that the AO while considering the allowance of the interest expenditure in the assessment Order had completely ignored to consider and apply the provisions of Section 14A of the' Act r/w Section 10(33) of the Act which existed at the time of framing assessment on 13th March, 2002 hence this assessment Order was erroneous and prejudicial to the interest of Revenue and hence CIT has rightly invoked his powers under Explanation to Section 263(1) of the Act in view of ratio of decisions of apex Court in the case of Shri Arbuda Mills Ltd. (supra) wherein they held that as per Explanation to Section 263(1) introduced w.e.f. 1st June, 1989 extends to such items, which have not been considered and decided in the appeal filed by the assessee because from the ratio of the decision (supra) we can safely conclude that even the powers of CIT under Section 263 would also definitely extend to those assessment Orders passed by the AO in which he has neither considered nor applied the existing statutory provisions of Section 14A of IT Act nor the same were applied and considered by the 1st appellate authority or by 2nd appellate authority."
47.1 On perusal of the Order of Tribunal, it is clear that according to it, the proviso attached to Section 14A only controls and excludes the powers of the 1TO in relation to asst. yr. 2001-02 and earlier years by taking recourse to Sections 147/148 and 154 of the IT Act, 1961. It may be pointed out that the Tribunal has also considered the decision of Cochin Bench of Tribunal in the case of Paul John, Delicious Cashew Co. v. ITO (supra) and agreed with the Revenue that the facts of that case were distinguishable. It has been pointed out that in that case the return was processed under Section 143(1) on 27th Dec, 2001 and the AO had a very limited scope under the amended provisions of Section 143(1) of the Act. Therefore, the AO had no occasion to consider the allow ability of expenditure with reference to the provisions of Section 14A of the Act, though the same were existing on the statute at that time. Whereas, in the case of Hexa Securities (supra), the assessment was completed under Section 143(3).
47.2 In our view, the decision of Tribunal in the case of Hexa Securities (supra) though it was in relation to Section 263, is based upon correct interpretation of Section 14A and proviso attached thereto and the same is relevant to the issue raised before the Special Bench.
47.3 In view 'of the above, whereas, the decision in the first case i.e. Navin Bharat (supra) is distinguishable, the same is not to be followed and the decision in the second case i.e. Hexa Securities (supra) is based on correct appreciation of the provisions contained under Section 14A and the proviso attached thereto and the same has to be followed and applied.
The question is, therefore, answered accordingly.
48. The Hon'ble President has also directed the Special Bench to decide the appeal. Hence, we proceed to decide the appeal filed by the assessee. The grounds of appeal raised by the assessee are as under:
(i) That on the facts and in the circumstances of the case, and under the provisions of law, the lower authorities have erred in disallowing the interest to the tune of Rs. 12,94,978.
(ii) That the petitioner reserves the right to assail the assessment on any additional ground, which may be advanced at the time of hearing of the appeal.
48.1 Briefly stated the facts of the case are as follows : The assessee during the relevant year derived income from business of sub-letting of properties. In addition, it also received income from interest and dividend. The assessee received interest income of Rs. 6,79,968 on interoperate deposits and received dividend income of Rs. 3,06,630 from share investment in a subsidiary company. The dividend related to financial year 1995-96 but the same was declared and received on 9th May, 1997 i.e. during the relevant assessment year. The assessee had declared the entire income from sub-letting, interest and dividend as business income. The assessee paid interest of Rs. 20,34,339 on borrowings made, which was claimed as deduction. The assessee explained before the AO that it had a composite business activity of subletting, inter-corporate deposits and investment in shares and therefore, interest on borrowings made for such business activities could not be disallowed even if some borrowings had been invested in tax-free income generating assets. Reliance was placed on the judgment of Hon'ble Supreme Court in case of Indian Bank (supra). It was also submitted that there was no nexus between borrowings and the investment in shares. The assessee further submitted that even if the view was taken that interest was to be disallowed in relation to dividend income, the dividend was exempt only from 1st June, 1997 and no interest could, therefore, be disallowed for the period upto 31st May, 1997. The AO was not satisfied. It was held by him that sub-letting was the only business activity of the assessee and for this business borrowing was not required. He assessed the interest and dividend as income from other sources. As the dividend related to financial year 1995-96, the AO, held that interest on borrowings utilized for investment in shares had no nexus with income from dividend. Moreover, he further observed that dividend income was exempt under Section 10(33). Considering all these factors, he allowed deduction of interest proportionate to the borrowings invested in the inter-corporate deposits, which had earned interest of Rs. 6,79,678. The balance interest of Rs. 12,94,978 (20,34,339 - 6,79,678) was disallowed as not incurred for the purpose of business. In appeal, the assessee reiterated the submissions made before the AO. The CIT(A), however, upheld the view taken by the AO that interest and dividend income was to be assessed under the head 'Other sources'. He confirmed the part disallowance of interest after observing that the borrowings to that extent were not wholly and exclusively used for the purpose of business. Aggrieved by the said decision, the assessee is in appeal and entire disallowance of interest is subject matter of dispute before the Tribunal.
49. Before us, the learned Authorised Representative for the assessee argued that the dividend income earned during the year had been offered for tax. It was submitted that there was no interest-free advance given to any person and the borrowings had thus not been utilised for any tax-free income. Therefore, there was no case for disallowance. The learned Authorised Representative for the assessee also argued that even if the dividend income was exempt, the assessee had a composite activity of sub-letting, inter-corporate deposits and investment in shares and therefore, interest on borrowings utilized for the composite business activities has to be allowed even if some of the activities did not yield any taxable income. Reliance was placed on the judgment of Hon'ble Supreme Court in case of Indian Bank (supra) and in the case of Rajasthan State Warehousing Corporation (supra). The attention of learned Authorised Representative was drawn to Section 14A which was inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962 as per which any expenditure incurred by the assessee in relation to the income which did not form part of total income, was not allowable. The learned Authorised Representative then came up with the plea that even if Section 14A was applicable, the Tribunal had no power to disallow interest in view of proviso to Section 14A inserted by the Finance Act, 2002 as per which the AO was not empowered to reopen or rectify any assessment for the asst. yr. 2001-02 and earlier years. It was argued that in case the AO was not empowered to reopen or rectify any assessment for asst. yr. 2001-02 and earlier years, the Tribunal could also not take any action in relation to disallowance of expenses relating to those years as it would amount to enhancing the amount for which the Tribunal had no powers. It was also pointed out that the assessment Order in this case had been passed on 20th March,.2001 when the Section 14A was not on the statute.
50. We have already examined the issue regarding applicability of Section 14A by the appellate authorities and have held in earlier part of this Order that CIT(A) and the Tribunal are empowered to apply the provisions of Section 14A in the appeals pending before them for the asst. yr. 2001-02 and earlier years even if Section 14A had not been invoked by the AO or the said provision was not available at the time of assessment. In this case, though the assessment for the asst. yr. 1998-99 had been completed by the AO before Section 14A was inserted on the statute, but the appeal for the said year is still pending before the Tribunal. The dispute raised before the Tribunal is disallowance of interest on the borrowings part of which prima fact have gone into the investment in shares yielding tax-free income which is clear from the balance sheet for the relevant year placed on record. The perusal of the balance sheet shows that in the beginning of the year i.e. on 1st April, 1997, the funds available with the assessee were to the tune of Rs. 145 lacs, which consisted of own funds of Rs. 22.60 lacs and borrowings of Rs. 122.40 lacs. As against that, the investments were : Rs. 16.42 lacs in fixed assets; Rs. 88.82 lacs in shares and balance in loans and advances. The investment in shares remained for the entire year as the closing balance of shares was Rs". 98.70 lacs. The borrowings also continued with a closing balance of Rs. 115.70 lacs. These figures clearly show that substantial borrowings were utilized for investment in shares as own funds were only to the tune of Rs. 22.60 lacs out of which investment in fixed assets alone was Rs. 16.42 lacs. The investments in shares of the subsidiary company are long-term investments and are not held as trading stock. The dividend income received/receivable from the investment in shares is not taxable w.e.f. 1st June, 1997. In this year since the dividend was received on 9th May, 1997 for earlier year, it was taxable and had rightly been offered for tax. But after the record date in May, 1997, any dividend that may be received after 1st June, 1997 is not taxable. Therefore, the borrowings utilized in investment of shares are not going to yield any taxable income after 31st May, 1997. Thus, the interest on borrowings utilized in investment in shares for the period 1st June, 1997 to 31st March, 1998, is not allowable as deduction while computing the taxable income of the assessee in view of Section 14A. In fact, the assessee, before the lower authorities had made an alternate submission that disallowance of interest if any could be made only for the period 1st June, 1997 to 31st March, 1998. There is a prima facie case as pointed out earlier that substantial borrowings have been utilized for investment in shares. However, exact computation of interest on borrowings utilised for investment in shares will require detailed scrutiny. We, therefore, restore this issue to the file of the AO for quantification of interest for the period 1st June, 1997 to 31st March, 1998 in respect of borrowings utilized for investment in shares and the same will be disallowed. The balance interest will be allowed as deduction as no other tax-free income has been brought to our notice. We Order accordingly.
51. Consequently, the ground taken by the assessee is allowed for statistical purposes.
While parting with the matter, we would like to record our appreciation for the assistance rendered by the learned Counsel for the assessee Shri R.M. Mehta and the learned Counsel for the intervener Shri P.F. Kaka, who have elaborated each point and have brought sufficient material for our study and examination. Similarly, we commend the efforts made by Shri Rajnish Kumar and Shri K.C. Jain, the learned CIT-Departmental Representatives, who have rendered great assistance by submitting their oral and written submissions duly supported by relevant case laws. We would also like to point out that although we have examined all the case laws referred to by the learned representatives of the parties during the course of hearing but we have considered only the relevant case laws and have not discussed the other cases which, in our view, are not relevant and the mention of which would unnecessarily add to the bulk of this Order.
In the result, the appeal stands allowed for statistical purposes and is decided accordingly.