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TMI Blog2022 (7) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent of income claimed exempt for the AY under consideration. (ii) The appellant craves leave to add, alter or amend any or all of the grounds of appeal before or during the course of appeal. 2. The brief facts of the case are that during the assessment proceedings, the Assessing Officer noticed that apart from other income the assessee during the year earned tax exempt dividend income of Rs.37080750/- arisen on the investments made by the assessee. However, the assessing officer noticed that the own funds of the assessee were not sufficient to meet the investments in question. Assessing officer, therefore, applied the provisions of section 14A read with rule 8D of the Income Tax Rules and computed the expenditure relatable to the aforesaid tax exempt dividend income at Rs.1 0621 0110. Since the assessee in its computation of income had suo moto disallowed an amount of Rs.2 254 8285 on account of expenditure relatable to the tax exempt dividend income earned by the assessee, the assessing officer, therefore, disallowed the balance amount of Rs.8 366 1625/- and added back the same into the income of the assessee and computed the taxable income of the assessee accordingly. Bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, the Legislature has made two changes to section 14A through the Finance Act, 2022, which are as follows: a. Insertion of Non-obstante clause by way of substitution and, b. Insertion of an Explanation to re-enforce by way of clarification the contents of the CBDT's Circular No.05/2014 dated 11/02/2014 a. Insertion of Non- obstante clause: The main objective to substitute a non-obstante clause in sub-section 1 appended to section 14A which reads as follows "Notwithstanding anything to the contrary contained in this Act, for the purpose of is to overcome the observations made by the Hon'ble Madras High Court in Redington (India) Ltd v. Addl.CIT, (2017) 392 ITR 633, 640 (Mad), wherein it was observed that an assessment in terms of the Act is specific to an assessment year and related previous year as per section 4 read with section 5 of the Act. And if any contrary intention would have been there it would have been expressly stated therein (section 14A) therefore, the language of section 14A should be read in that context such that it advances the scheme of the Act rather than distort it. Thus this judicial observation interpreted that section 14A would apply only wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of expenditure u/s 14A cannot exceed the tax exempt income earned by the assessee during the year. He, in this respect, has made the following written submissions: "The Finance Act, 2022 has brought in amendment into Section 14A of the Income-tax Act, 1961 (Act'). Section 14A of the Act was introduced in the year 2001 with retrospective effect from the year 1962 to state that no deduction shall be granted towards an expenditure incurred in relation to an income which does not form part of the Total Income. The method for identifying the expenditure incurred is prescribed under Rule 8D of the Income-tax Rules, 1962 (Rules). From its inception, the applicability of this provision has always been a subject matter of litigation and one such point that has been oftdebated is regarding the disallowance of expenditure in the absence of exempt income. In the year 2009, a Delhi Special Bench Tribunal in Cheminvest Ltd. v. CIT, 317 ITR 86 took a view that when an expenditure is incurred in relation to an exempt income, irrespective of the fact whether any exempt income was earned by the Assessee or not, disallowance should be grieved by the Assessee. To further this, a circular wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lked in on the introduction of Section 14A, the issue pertaining to expenditure disallowance being higher than exempt income has been a point of litigation before various fora and decided in favour of the taxpayers holding that disallowance under Section 14A cannot exceed the exempt income earned. With this being the position, now a question may arise as to whether the proposed amendment will have its application only in a situation where exempt income is NIL. If the answer to this is in the affirmative, the next question would be whether the position laid down by the Courts as mentioned supra would continue to have authority? Going by the plain reading of the explanation inserted, it appears to the naked eye that disallowance would be suffered only in cases where exempt income is not at all accrued or incurred in a particular year. That being the case, it can be asserted that a position that disallowance of expenditure cannot exceed the quantum of exempt income would continue to apply dehors the amendment proposed. Can disallowance be litigated where no exempt income is received at all from an investment? Another issue that needs to be analysed is whether disallowance under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. The AO should be in a position to pinpoint, with an acceptable degree of accuracy, that the expenditure which was incurred is related to the income which is not subject to tax. The Hon'ble ITAT Delhi Bench "E" (Third Member) in the case of Wimco Seedlings Ltd Vs. Deputy Commissioner of Income-tax (Asst.), Special Range, Moradabad reported in [2007] 107 ITD 267 (Delhi) (TM) has observed that only expenditure which has been proved to have been incurred in relation to the earning of tax-free income, can be disallowed and the section cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax-free income. The word 'incurred' refers to the factual spending of the expenditure in relation to the exempt income and does not refer to a deemed spending or assumed spending for the purpose. While applying the section there is no authority conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to determine, on the basis prescribed, the amount of expenditure incurred in relation to income which is exempt from income tax. Even here the Assessing Officer has to first record a finding that he is not satisfied with the correctness of the assessee's claim regarding such expenditure. Sub-section (3) clinches the position by saying that the Assessing Officer can determine the amount of expenditure incurred in relation to exempted income on the prescribed basis even where the assessee claims that no such expenditure was incurred by him as a matter of fact. Whether the provisions of Section 14A will have a retroactive application? Another possible issue that can arise is the retroactive application of the provision. Though the Act says that the amendment is going to be made effective from AY 2022-23 only, the explanation inserted portrays a different understanding. Generally, when an amendment is brought into a statute, it is considered to be prospective unless stated otherwise expressly. The amendment proposed in the section is worded as under: 'Section 14A shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Special Leave Petition (Civil) Diary No(s). 38584/2018 dated 19/11/2018], the order of CIT(A) in the Appellant's case in holding that disallowance u/s 14A read with Rule 8D cannot exceed the income claimed exempt aligns with the said order. Therefore, the amendment in Sec. 14A by the Finance Act 2022 by inserting an Explanation to Sec. 14A clarifying that no exempt income is earned in any year, disallowance u/s 14A will still be attracted, alters the position of law adversely to the assessee. Hence, such an amendment cannot be held to be retrospective in nature. In arguendo, it is the submission that if the amendment for disallowance of expenditure even where no exempt income is earned is retroactively applied, then as a corollary the dividend income which is now made taxable should also be made applicable retrospectively, and thus no disallowance of expenditure would be warranted. Further, the amendment has been made effective from 01.04.2022 and accordingly applies to A.Y. 2022-23 and onwards. Thus, the amendment does not affect the present appeals wherein the assessment years involved are 2009-10, 2012-13, 2013-14 and 2014-15. In view of the submissions made herein ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains of business or profession, Capital gain and Income from other sources except as otherwise provided. There are specific provisions governing the allowance of deductions from income chargeable under these heads of income. However, since the issue in this appeal is related to disallowance of expenditure incurred to earn dividend income either out of the expenditure claimed under business head or out of the expenditure claimed in respect of income from other sources, hence, the provisions section 37 and section 57 being general sections relating to allowance of expenditure in computing the net taxable income of the assessee under the heads "Income from business and profession" and "Income from other sources" are relevant to decide the present issue, which, for the sake of ready reference, are reproduced as under: 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the provisions of section 37 of the Act, observed, "A plain reading of the above provision makes it clear that it is a residuary provision and allows an expenditure, not covered under ss. 30 to 36, in computing the income chargeable under the head "Profits and gains of business or profession", provided its other requirements are satisfied. They are: (i) the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession, and (iii) it should have been expended in the previous year." The Hon'ble Supreme court further noted that the disallowance of the expenditure in the aforesaid case was not for non-compliance of requirements of s. 37(1) of the Act, but for the reason that the expenditure was incurred on an activity from which income was exempted under the Act. The hon'bleSupreme Court laid down the following principles for allowance or disallowance of deduction in such anscenario: - (i) if the income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act." (This section has been inserted by the Finance Act 2001 with retrospective effect from 1.4.1962. At the time of insertion there were no sub-sections.) 10. In the Memorandum explaining the above provision in the Finance Bill, 2001, it has been stated as under: "No deduction for expenditure incurred in respect of exempt income against taxable income - Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment takes effect retrospectively from 1st April, 1962, and accordingly, applies in relation to the assessment year 1962-1963 and subsequent assessment years." 12. This section was enacted to overcome the decision of Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation vs. CIT (supra) wherein, it was held that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of expenditure could not be made. However, the legal position as provided under section 37 and section 57 remains the same that only the expenses which are directly related to taxable income are to be allowed as deduction. The provisions of section 14A were inserted neither for any levy of new taxes nor for making of any disallowance of expenditure for the first time, but only to clarify the existing position that any expenditure which is not related to earning of taxable income is not allowable irrespective of the fact that whether taxable income has arisen or accrued or not and conversely any expenditure relatable to non-taxable income was to be disallowed. Further Before proceeding further, even at the cost of repletion, it is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income.Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A" (emphasis supplied by us ) 14. Thus, the following points emerge from the above observation of the Supreme court in the case of Walfort (Supra) : 1. Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. 2. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. 3. On the same analogy the exemption is also in respect of net income.The expenses towards non-taxable income must be excluded. 4. If any of the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business." (emphasis supplied) 16. The Hon'ble Supreme Court, thus, has further clarified that Section 14 of the Act specifies five heads of income which are chargeable to tax. Income to be taxable must fall for classification under one of those five heads, namely, (i) Salaries; (ii) Income from house property; (iii) Profits and gains of business or profession; (iv) Capital gains; and (v) Income from other sources. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. The permissible deductions can be allowed only with reference to income which is brought under one of those heads and is chargeable to tax. If an income does not form part of the total income, then the related expenditure is liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CBDT. It has been explained that in the existing provisions of section 14A no method for computing the expenditure incurred in relation to income which does not form part of the total income had been provided. As a result there was a considerable dispute between taxpayers and the revenue on the method of determining such expenditure. In this background, sub-section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The method has been prescribed under Rule 8D of the Income Tax Rules, 1962 (inserted by the I.T. (fifth amdt.) Rules 2008 w.e.f. 24.03.2008), which is reproduced as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only craves to make a disallowance of expenditure related to exempt income. Allowance of deduction is subject to the condition of fulfilment of requirements of the respective provisions under each head of income. Thus, as per the provisions of section 14A, if an investment has been made for the purpose of earning of tax exempt income (either dividend income or long term capital gains or otherwise any other exempt income) and not for the solely or exclusively for business purpose or for earning of taxable income, the related expenditure is not admissible as deduction irrespective of the fact as to whether any tax exempt income has been actually earned /accrued or not. 21. The above position has been further clarified by the CBDT vide its circular No.5 of 2014, as is extracted below: Circular No. 5/2014 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New Delhi dated the 11th of February, 2014 Subject: - Clarification regarding disallowance of expenses under section 14A of the Income-tax Act in cases where corresponding exempt income has not been earned during the FY -regarding. Section 14A of the Income-tax Act, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the financial year under consideration. 5. The above position is further substantiated by the language used in Rule 8D(2(ii) & 8D(2)(iii) of I.T. Rules which are extracted below: "(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:- A*B/C Where........ B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; ................. (iii) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year." (Emphasis added) 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Commissioner of Income Tax, New Delhi reported in 2018] 91 taxmann.com 154 (SC), observing as under: . "In the first instance , it needs to be recognised that as per section 14A of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee " in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income, that has to be disallowed" .... ......This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. ** ** ** The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A." 25. To sum up, it has been time and again re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of chargeable income of the assessee under the relevant provisions of the Act. That, in our view, would be against the respective provisions governing the allowance of deduction out of income chargeable under different heads as provided under the Income Tax Act. 27. So far as the contention thatmere potential to earn an exempt income is not sufficient to make a disallowance in a case where the assessee has not earned any exempt income during the period when an investment has been held by him, we note that this question finds its answer in the discussion made by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. (supra) wherein the Hon'ble Supreme Court while rejecting the dominant purpose theory canvassed by the assessee, observed that even if an incidental dividend income is earned in the business of trading in shares, still this triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd.(supra). The Hon'ble supreme court further goes on to make distinction into the cases where the shares are held in stock in trade as com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercome the interpretation given by the various High Courts as noted above regarding the applicability of provisions of section 14A and to make the intention of the legislation clear and to make it free from any misinterpretation, the Parliament has brought in an Explanation to Section 14A of the Income Tax Act. Further, sub-section (1) of section 14 has been amended so as to include a non-obstante clause to provide that no direction shall be allowed in relation to exempt income, notwithstanding anything contrary contained in the Act. The amended section 14A is reproduced as under: "Expenditure incurred in relation to income not includible in total income. 14A. (1) Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, an assessee incurs an expense of Rs.1 lakh to earn non-exempt income of Rs.1.5 lakh and also incurs an expense of Rs.20,000/- to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued/received during the year, it amounts to holding that Rs.20,000/- would be allowed as deduction against non-exempt income of Rs.1.5 Lakh even though this expense was not incurred wholly and exclusively for the purpose of earning nonexempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act. (4) In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have alway ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch affects substantive rights and obligations is intended by the Legislature to have prospective effect. On the other hand, amendments on matters of procedure are presumed to be retrospective so as to apply to pending cases. These are, however, presumptions which can be outweighed by the language of an amending statute. That is because the Legislature has plenary power to legislate both prospectively and retrospectively. Therefore, whether an amending provision is to operate with prospective or retrospective effect has to be determined on the language and ambit of the statutory provision. Amendments which are clarificatory or declaratory of the position in law, as the Legislature intended it always to be, are regarded as being retrospective. Hence, when the Legislature steps in by amending the law to set right an incorrect judicial interpretation, an inference can be drawn that the amendment was intended to be retrospective. An amendment which is inserted to remedy unintended consequences and to make a provision workable or which supplies an obvious omission and is required to be read into a section to give it reasonable interpretation has been treated as retrospective in operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay had been incurred in the relevant previous year. While inserting section 43B it was not realized that its language would cause hardship to those taxpayers who had paid sales tax within the statutory period prescribed for payment although the payment did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year and could be paid only in the next quarter which fell in the next accounting year. Hence, though the sales tax had been paid by an assessee within the statutory period prescribed and prior to the filing of the income-tax return, the assessee was unwittingly prevented from claiming a deduction. This was not intended by section 43B. An amendment was made by the Finance Act of 1987 by the insertion of the first proviso. The Supreme Court held that the amendment was curative in nature and hence, the proviso which was inserted by the Finance Act of 1987 should be given retrospective effect from the date of the inception of section 43B. The Supreme Court held that the first proviso was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to an assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of any asset other than cash, shall be estimated to be the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date. Under rule 1BB the value of a house used for residential purposes was to be determined in a particular manner. The issue before the Supreme Court was whether this rule was a provision of substantive law, not expressly applicable to valuation for earlier years and therefore, only prospective or whether it was merely procedural and would apply to all pending cases. The Supreme Court held that rule 1BB "merely provides a choice amongst well known and well settled modes of valuation". Chief Justice M.N. Venkatachaliah speaking for the Court held that even in the absence of rule 1BB there would have been no legal impediment to adopt the mode of valuation embodied in rule 1BB by adopting the method of capitalization of income on a number of years' purchase value. The rule, held the Supreme Court, was intended to impart uniformity in valuations and to avoid vagaries and disparities resulting from the application of different modes of valuation in different cases where the nature of the property is similar. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use payable for service rendered in India shall be regarded as income earned in India. The Gauhati High Court held that the Explanation of 1983 was given effect from 1-4-1979 and would therefore, not apply to assessment years prior thereto. By the Finance Bill of 1999 a new Explanation was substituted with effect from 1-4-2000 which declared that income of the nature referred to in the clause payable for service rendered in India and the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract shall be regarded as income earned in India. The Supreme Court held that given the legislative history of section 9(1)(ii) it was only to be assumed that the Explanation was deliberately introduced with effect from 1-4-2000 and was therefore, intended to apply prospectively. The Supreme Court adverted to three circumstances : firstly, the departmental understanding of the effect of the 1999 amendment as contained in a circular of the Central Board of Direct Taxes afforded a reasonable construction thereof and there was no reason why the Supreme Court should not adopt it. Secondly, the cardinal principle of tax law is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adverting to its earlier decision, the Supreme Court held that the definition of the expression 'income' in section 2(24) is inclusive and includes losses. The Finance Act had merely intended to make what was otherwise implied, explicit. Since the expression 'income' had been held by the Supreme Court to include losses, consequently where in a case on account of addition of concealed income the loss returned stands reduced, a penalty would be leviable even prior to 1-4-2003 if the final assessed income is the loss. The amendment was therefore, regarded as being clarificatory in nature. 65. The following principles guide in determining as to whether an amendment is prospective or retrospective : (i) In determining as to whether an amendment is to take effect prospectively or with retrospective effect, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive; (ii) An amendment which is clarificatory is regarded as being retrospective in nature and would d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icatory amendment may be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision. Where the Legislature clarifies its intent, it is regarded as being declaratory of the law as it always stood and is therefore, construed to be retrospective. Further on the basis of above principles, the hon'ble High Court held that the rule 8D is prospective operation, which finding has been further upheld by the Hon'ble supreme Court. 34. Now applying the same principles, we have to see whether the newly inserted explanation to Section 14A vide Finance Act 2022 would operate prospectively or retrospectively. A perusal of the said explanation reveals that it starts with the words "For the removal of doubts, it is hereby clarified ......" Then the wording in the body of the provision expressly states: ".....the provisions of this section shall apply and shall be deemed to have always applied......" The opening words of the explanation reveal in an unambiguous manner that the said provision is clarificatory and has been inserted for removal of doubts. Further, as provided in the memorandum explaining the aforesaid provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttracting disallowance of expenditure incurred to earn exempt income. This position, only, has been reiterated and clarified by the aforesaid explanation to section 14A so as to remove the doubts and to make clear the intention of the legislature and to make the provision of section 14A free from any other interpretation. Therefore, it cannot be said that the aforesaid explanation proposes or saddle any fresh liability on the assessee. We are unable to agree with the contention of the Ld. AR of the assessee that the aforesaid explanation alters or change the law as it early stood. 36. So far as the effect of decision rendered by the various High Courts holding that no disallowance is to be attracted if no exempt income is earned is concerned, it is to be noted that the aforesaid proposition laid by the High Courts has not attained the finality. The issue is still open before the Hon'ble Supreme Court, which, of course is relating to the interpretation of the provisions of section 14A as they existed before the insertion of the aforesaid explanation. The reference can be made to the case titled as PCIT vs. Delhi International Airport Pvt. Ltd. [2022] 138 taxmann.com 113 (SC) where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Example can be given to the another recent amendment made by the Finance Act of 2022 by way of inserting explanation 3 in section 37 of the Income Tax Act, to clarify that any expenditure incurred by an assessee to provide any benefit or perquisite to a person and acceptance of such benefit by such person is in violation of any law or rule for regulation or guideline shall be included in the definition of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law and the same shall not be allowed as a deduction. The aforesaid explanation was inserted by the Parliament to clarify that the perquisite and benefits given by the pharmaceutical companies to the doctors for the marketing/promotion of their medicine, is not an allowable expenditure as the acceptance of such benefit or perquisite is unethical for the doctors as per the code of ethics laid down for doctors by the Medical Council of India.The explanation was inserted to overcome certain judicial decisions holding that such type of expenditure by the pharmaceutical companies was allowable as deduction on the analogy that though the acceptance of such benefits may be unethical for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not constitute a declaration of law under Article 141 of the Constitution or attract the doctrine of merger. Reliance can be placed on the judgement in the case of " P. Singaravelan and others vs. District Collector, Tiruppur and DT and others [(2020)3 SCC 133]" . The Apex Court in the case of Kunhayammed v. State of Kerala [(2000)6 SCC 359] has held that an order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An non speaking order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed. Also, in case of C.G. Govindan v. State of Gujarat and others [(1998) 7 SCC 625], the Supreme Court observed that this Court in the case of Supreme Court Employees' Welfare Association v. Union of India and Anr. (1989(4) SCC 187, State of Orissa and another v. DhirendraSundar Das and others [(2019) 6 SCC 270], Employees' Welfare Association v. Union of India & Anr.12 and State of Punjab v. Davinder Pal Singh Bhullar13, has observed and reiterated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the assessee having no exempt income will have to suffer more disallowance than the assessee having meagre exempt income. Even otherwise, in view of the discussion made above, the explanation seeks to clarify the position that the disallowance of expenditure relatable to exempt income is not dependent upon actual earning of any exempt income. 40. Now coming to the facts of the present case, the assessee during the year had earned tax exempt dividend income of Rs.3,70,80,750/- and had made suo moto disallowance of Rs.22548285/- u/s 14A. The AO noted that the assessee had debited interest expenses of Rs.8,79,14651/-. The AO further noted that the assessee was not maintaining separate books of accounts. He noted that as per the balance sheet the assessee had invested 1,86,82,00,000/- in equity shares whereas the availability of interest free funds with the assessee was only of Rs.17,30,86,083/-. The AO therefore, show-caused the assessee as to why the provisions of 14A should not be invoked and the interest attributable to the investment in shares should not be disallowed. The AO noted that the assessee however has not given any details regarding the source of fund invested in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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