TMI Blog2008 (2) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer before section 14A was inserted on the statute, but the appeal for the said year is still pending before the Tribunal. The perusal of the balance sheet shows that in the beginning of the year i.e., on 1-4-1997, the funds available with the assessee were to the tune of Rs. 145 lakhs, which consisted of own funds of Rs. 22.60 lakhs and borrowings of Rs. 122.40 lakhs. As against that, the investments were Rs. 16.42 lakhs in fixed assets; Rs. 88.82 lakhs in shares and balance in loans and advances. The investment in shares remained for the entire year as the closing balance of share was Rs. 98.70 lakhs. The borrowings also continued with a closing balance of Rs. 115.70 lakhs. 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 lakhs out of which investment in fixed assets alone was Rs. 16.42 lakhs. 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 with effect from 1-6-1997. In this year since the dividend was received on 9-5-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest 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 ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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 (Mum) 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 legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 restricti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partmental 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 (Succ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound 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 limita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposive 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 CIT 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 14A 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 rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal 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 compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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