TMI Blog2022 (7) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent they are relatable to the earning of 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.The expenses towards non-taxable income must be excluded.If any of the expenses incurred for earning of taxable income are relatable to exempt income also or common expenses have been used for taxable as well as exempt income, the expenses relatable to exempt income have to be apportioned and disallowed. For the purpose of calculation of disallowance under this rule, the value of investments not only income from which does not but also shall not part of the total income are to be considered. Similarly in Rule 8(2) (iii) the words does not and shall not have been used in respect of exempt income for calculating the disallowance @0.5 % of the value of investments. In our view, the words does not and shall not have their own significance. The words does not refer to the income which has already been received and the words shall not refers to the income which may be received. Only the expenditure relatable to earning of taxable income h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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. Coming to the facts of the present case assessee has made suo moto disallowance by not following any systematic or specific method of calculation but only on estimation on the basis of disallowance made in assessment orders in earlier assessment years. Since the assessee could not show to the AO as on the basis of what methodology the suomo to disallowance was made by the assessee, therefore, the AO proceeded to compute the disallowance by applying Rule 8D. A perusal of the assessment order reveals that the same is a detailed and speaking order recording the reasons on the basis of which the AO was not satisfied with the suo moto disallowance made by the assessee. In appeal before the CIT(A), the assessee took the plea that he had made strategic investment in group companies for business purposes. However, the ld. CIT(A) relied upon the decision of the Hon ble Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the year earned tax exempt dividend income of Rs.37080750/- arisen on the investments made by the assessee. However, the assessing officer noticed that the own funds of the assessee were not sufficient to meet the investments in question. Assessing officer, therefore, applied the provisions of section 14A read with rule 8D of the Income Tax Rules and computed the expenditure relatable to the aforesaid tax exempt dividend income at Rs.1 0621 0110. Since the assessee in its computation of income had suo moto disallowed an amount of Rs.2 254 8285 on account of expenditure relatable to the tax exempt dividend income earned by the assessee, the assessing officer, therefore, disallowed the balance amount of Rs.8 366 1625/- and added back the same into the income of the assessee and computed the taxable income of the assessee accordingly. Being aggrieved by the above order of the assessing officer, the assessee filed appeal before the CIT(A). The learned CIT(A), however, while relying upon the decision of the hon ble Delhi High Court in the case of PCIT versus Moderate Leasing and Capital services Private Limited 102 (2018) dated31/01/2018, held that the disallowance under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014 dated 11/02/2014 a. Insertion of Non- obstante clause: The main objective to substitute a non-obstante clause in sub-section 1 appended to section 14A which reads as follows Notwithstanding anything to the contrary contained in this Act, for the purpose of is to overcome the observations made by the Hon'ble Madras High Court in Redington (India) Ltd v. Addl.CIT, (2017) 392 ITR 633, 640 (Mad), wherein it was observed that an assessment in terms of the Act is specific to an assessment year and related previous year as per section 4 read with section 5 of the Act. And if any contrary intention would have been there it would have been expressly stated therein (section 14A) therefore, the language of section 14A should be read in that context such that it advances the scheme of the Act rather than distort it. Thus this judicial observation interpreted that section 14A would apply only where exempt income was earned in the relevant previous year and would not be applied to notional/anticipated exempted income that is not earned in the previous year and thus had made the Circular No.05/2014 dated 11/02/2014 infructuous. b. Insertion of an Explanation: The explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was issued by the CBDT in the year 2014 Circular No. 5/2014 dated February 11, 2014 reiterating the view of the Special Bench. However, even after the circular issued by CBDT, rulings still emerged that when there is no exempt incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious fora and decided in favour of the taxpayers holding that disallowance under Section 14A cannot exceed the exempt income earned. With this being the position, now a question may arise as to whether the proposed amendment will have its application only in a situation where exempt income is NIL. If the answer to this is in the affirmative, the next question would be whether the position laid down by the Courts as mentioned supra would continue to have authority? Going by the plain reading of the explanation inserted, it appears to the naked eye that disallowance would be suffered only in cases where exempt income is not at all accrued or incurred in a particular year. That being the case, it can be asserted that a position that disallowance of expenditure cannot exceed the quantum of exempt income would continue to apply dehors the amendment proposed. Can disallowance be litigated where no exempt income is received at all from an investment? Another issue that needs to be analysed is whether disallowance under Section 14A could still be made where no exempt income is received in any year against an investment that has the potential to provide an exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 conferred by the section upon the Assessing Officer to deem or assume certain exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 has not been received during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial 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 submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r five heads i.e. Salaries, Income from house property, Profits and gains of business or profession, Capital gain and Income from other sources except as otherwise provided. There are specific provisions governing the allowance of deductions from income chargeable under these heads of income. However, since the issue in this appeal is related to disallowance of expenditure incurred to earn dividend income either out of the expenditure claimed under business head or out of the expenditure claimed in respect of income from other sources, hence, the provisions section 37 and section 57 being general sections relating to allowance of expenditure in computing the net taxable income of the assessee under the heads Income from business and profession and Income from other sources are relevant to decide the present issue, which, for the sake of ready reference, are reproduced as under: 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatable to the non-taxable income, being exempt u/s 10(29) of the Act.TheHon ble Supreme court referring to the provisions of section 37 of the Act, observed, A plain reading of the above provision makes it clear that it is a residuary provision and allows an expenditure, not covered under ss. 30 to 36, in computing the income chargeable under the head Profits and gains of business or profession , provided its other requirements are satisfied. They are: (i) the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession, and (iii) it should have been expended in the previous year. The Hon ble Supreme court further noted that the disallowance of the expenditure in the aforesaid case was not for non-compliance of requirements of s. 37(1) of the Act, but for the reason that the expenditure was incurred on an activity from which income was exempted under the Act. The hon bleSupreme Court laid down the following principles for allowance or disallowance of deduction in such anscenario: - (i) if the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying down the same ratio decidendi that the Legislature inserted section 14A by the Finance Act 2001 with retrospective effect from 1.4.1962, which read as under: 14A.For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (This section has been inserted by the Finance Act 2001 with retrospective effect from 1.4.1962. At the time of insertion there were no sub-sections.) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts where he proceedings have become final before the first day of April, 2001 should not be reopened under section 147 of the Act to disallow expenditure relatable to the exempt income by applying the provisions of section 14A of the Act. 25.4 This amendment takes effect retrospectively from 1st April, 1962, and accordingly, applies in relation to the assessment year 1962-1963 and subsequent assessment years. 12. This section was enacted to overcome the decision of Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation vs. CIT (supra) wherein, it was held that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of expenditure could not be made. However, the legal position as provided under section 37 and section 57 remains the same that only the expenses which are directly related to taxable income are to be allowed as deduction. The provisions of section 14A were inserted neither for any levy of new taxes nor for making of any disallowance of expenditure for the first time, but only to clarify the existing position that any expenditure which is not related to earning of taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net 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 relatabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. . Therefore, one needs to read the words expenditure incurred in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the total income for the purpose of chargeability to tax. As stated above, the scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. (emphasis supplied) 16. The Hon ble Supreme Court, thus, has further clarified that Section 14 of the Act specifies five heads of income which are chargeable to tax. Income to be taxable must fall for classification under one of those five heads, namely, (i) Salaries; (ii) Income from house property; (iii) Profits and gains of business or profession; (iv) Capital gains; and (v) Income from other sources. Sections 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from 11-5-2001). 18. The purpose of introduction of the provisions of sub-sections (2) and (3) has been explained in - Circular 14 of 2006 of the CBDT. It has been explained that in the existing provisions of section 14A no method for computing the expenditure incurred in relation to income which does not form part of the total income had been provided. As a result there was a considerable dispute between taxpayers and the revenue on the method of determining such expenditure. In this background, sub-section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The method has been prescribed under Rule 8D of the Income Tax Rules, 1962 (inserted by the I.T. (fifth amdt.) Rules 2008 w.e.f. 24.03.2008), which is reproduced as under: 8D. (1) Where the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived and the words shall not refers to the income which may be received. 20. A perusal of the provisions of section 14A would show that section 14A does not seek to confer or provide for allowance of any expenditure as a deduction which, otherwise, is not allowable or in other words has not been incurred for earning of taxable income.The provisions of section 14A in no manner advance any favour to an assessee for the purpose of allowance of an expenditure. It only craves to make a disallowance of expenditure related to exempt income. Allowance of deduction is subject to the condition of fulfilment of requirements of the respective provisions under each head of income. Thus, as per the provisions of section 14A, if an investment has been made for the purpose of earning of tax exempt income (either dividend income or long term capital gains or otherwise any other exempt income) and not for the solely or exclusively for business purpose or for earning of 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 cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word income of the year but income under the Act . This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by the language used in Rule 8D(2(ii) 8D(2)(iii) of I.T. Rules which are extracted below: (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:- A*B/C Where........ B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph 17, this Court went on to observe that: Therefore, one needs to read the words expenditure incurred in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the total income for the purpose of chargeability to tax. The views expressed in Walfort Share and Stock Brokers (P.) Ltd. (supra), in our considered opinion, yet again militate against the plea urged on behalf of the Assessee. 24. The Hon ble Supreme Court further reiterated the above principle in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi reported in 2018] 91 taxmann.com 154 (SC), observing as under: . In the first instance , it needs to be recognised that as per section 14A of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act . Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income, that has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their findings in this respect laying the proposition that as if the disallowance of expenditure u/s 14A is dependent upon the actual earning of exempt income. That if the expenditure incurred for taxable income has the potential of earning of exempt income, the disallowance relatable to exempt income can be attracted only if the exempt income is actually earned during the year. However, in our view, the above interpretation cannot be widened/extended to hold that disallowance of expenditure relatable to exempt income cannot be made if no exempt income is earned or that the disallowance u/s 14A cannot exceed the exempt income received irrespective of the fact that the expenditure claimed is not relatable to earning of chargeable income of the assessee under the relevant provisions of the Act. That, in our view, would be against the respective provisions governing the allowance of deduction out of income chargeable under different heads as provided under the Income Tax Act. 27. So far as the contention thatmere potential to earn an exempt income is not sufficient to make a disallowance in a case where the assessee has not earned any exempt income during the period when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable income; secondly, about those cases where there is as such no such potential but it would be a quirk of fate that the assessee earns some incidental exempt income. This triggers the applicability of section 14A of the Act and which is based on the theory of apportionment of expenditure and between taxable and non-taxable income and to that extent in such cases depending upon the fact of each case, the expenditure incurred in acquiring those shares will have to be apportioned. The Hon ble Supreme Court, however, held that the disallowance u/s 14A would be attracted in both type of cases rejecting the dominant purpose theory. 29. In order to remove theprevailing doubts about the interpretation of the provisions of section 14A and to overcome the interpretation given by the various High Courts as noted above regarding the applicability of provisions of section 14A and to make the intention of the legislation clear and to make it free from any misinterpretation, the Parliament has brought in an Explanation to Section 14A of the Income Tax Act. Further, sub-section (1) of section 14 has been amended so as to include a non-obstante clause to provide that no direction shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income as per the provisions of the Act (exempt income). (2) Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year. (3) CBDT issued Circular No. 5/2014, dated 11/02/2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no 32 disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, an assessee incurs an expense of ₹1 lakh to earn non-exempt income of ₹1.5 lakh and also incurs an expense of ₹20,000/- to earn exempt income which may or may not have accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax [2010] 194 Taxman 203 (Bombay) has extensively discussed the legal position on this issue and has summarised the law on the issue of retrospective or prospective operation of a provision while relying upon the various decisions of the hon ble Supreme Court. The Hon ble Bombay high Court after analysing the legal position held that the rule 8D of the Income Tax rules would apply prospectively. The relevant part of the order discussing the legal position and judicial precedents is reproduced as under: 63. The fundamental principle of law is that Parliament has plenary power to legislate, on matters falling within its legislative competence and that power extends to the enactment of legislation with prospective and retrospective effect. Legislative competence of Parliament to enact the law is not in dispute. Law raises a presumption that an amendment which affects substantive rights and obligations is intended by the Legislature to have prospective effect. On the other hand, amendments on matters of procedure are presumed to be retrospective so as to apply to pending cases. These are, however, presumptions which can be outweighed by the language of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y exercising subordinate legislative functions cannot make a rule, regulation or bye-law which can operate with retrospective effect (see SubbaRao, J. in Dr.IndramaniPyarelal Gupta v. W.R. Natu [1963] 1 SCR 721 - the majority not having expressed any different opinion on the point; Modi Food Products Ltd. v. Commissioner of Sales Tax [1955] 6 STC 287, India Sugars Refineries Ltd. v. State of Mysore AIR 1960 Mys. 326 and General S. Shivdev Singh v. State of Punjab [1959] PLR 514 (FB). (ii) In Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205 , the Supreme Court considered the provisions of section 43B of the Income-tax Act, 1961 which were aimed at curbing activities of those taxpayers who did not discharge their statutory liability towards payment of excise duty, employer's contribution to provident fund etc., for long periods of time, but claimed deductions on the ground that the liability to pay had been incurred in the relevant previous year. While inserting section 43B it was not realized that its language would cause hardship to those taxpayers who had paid sales tax within the statutory period prescribed for payment although the payment did not fall in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given in respect of tax, duty, cess or fee by stating that if this was paid before the date of filing of the return under the Income-tax Act, the assessee would be entitled to a deduction. This relaxation, however, did not apply to contributions to labour welfare funds. By the Finance Act of 2003 uniformity was brought about by equating the payment of tax, duty, cess and fee with contributions to welfare funds. The Finance Act of 2003 was made applicable only with effect from 1-4-2004. Hon'ble Mr. Justice S.H. Kapadia (as the Learned Chief Justice then was) speaking for the Supreme Court held that it was curative in nature and would apply retrospectively with effect from 1-4-1988; (v) In Sharvan Kumar Swarup Sons' case (supra), rule 1BB of the Wealth-tax Rules, 1958 came up for consideration. Prior to its amendment on 1-4-1989 section 7(1) of the Wealth-tax Act provided that subject to any Rules made in this behalf, the value of any asset other than cash, shall be estimated to be the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date. Under rule 1BB the value of a house used for residential purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to tax under section 9(1)(ii) read with the Explanation thereto in the Income-tax Act, 1961. Under section 5(2) the scope of total income as regards a non-resident was defined with reference to the receipt or accrual in India, whether deemed or actual. Section 9 defines income deemed to accrue or arise in India. By clause (ii) of sub-section (1) of section 9, income which falls under the head 'Salaries', if it is earned in India is included in such income. The Gujarat High Court had held that the words earned in India had to be interpreted as arising or accruing in India and not from service rendered in India . Hence, as long as the liability to pay an amount under the head 'Salaries' arose in India, clause (ii) could be invoked. To overcome this decision, section 9(1)(ii) was amended by the Finance Act of 1983 with effect from 1-4-1979 to include an Explanation. The Explanation provided that income of the nature referred to in the clause payable for service rendered in India shall be regarded as income earned in India. The Gauhati High Court held that the Explanation of 1983 was given effect from 1-4-1979 and would therefore, not apply to assessment years p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the returned income was a loss. This question had to be considered in the background of the amendment made by the Finance Act of 2002 with effect from 1-4-2003 in Explanation 4 to section 271(1)(c)(iii ). In its earlier decision in the case of Virtual Soft Systems Ltd. v. CIT [2007] 159 Taxman 155, the Supreme Court had rejected the contention of the revenue that the amendment was clarificatory and retrospective holding that the amendment was stated to take effect from 1-4-2003. In Gold Coin Health Food (P.) Ltd.'s case (supra) the larger Bench held that the Court has to analyze the nature of the amendment to come to a conclusion whether it is in reality a clarificatory or declaratory provision. Hence, the date from which the amendment is made operative does not conclusively decide the question. The Court would have to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether the amendment is clarificatory or substantive. Adverting to its earlier decision, the Supreme Court held that the definition of the expression 'income' in section 2(24) is inclusive and includes losses. The Finance Act had merely intended to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons resulting from the application of different methods in respect of properties of a similar nature and character, the Court would place a construction on the statutory provision, giving the retrospective effect. 33. The above principles which have culled out by the Ho ble High Court from various decisions of the Hon ble Supreme Court it has been settled that in determining as to whether an amendment is to take effect prospectively or with retrospective effect, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive. Further that an amendment which is clarificatory is regarded as being retrospective in nature and would date back to the original statutory provision which it seeks to amend. A clarificatory amendment is an expression of intent which the Legislature has always intended to hold the field. A clarificatory amendment may be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision. Wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable income that the basic principle of the taxation is to tax the net income and on the same analogy the exemption is also in respect of net income. The Hon ble Supreme Court thus way back in the year 2010 has, by saying so, held that the expenditure in relation to earning of exempt income has to be disallowed and exemption is only of net income. The Hon ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (2002-TIOL-751-SC/115 ITR 519 (SC) has held that even if there was no income, the expenditure is allowable. It is now wellsettled that income includes loss also as held by the Hon ble Supreme Court in the case of CIT vs. Harprasad Co. P Ltd. 99 ITR 118 (SC). As held by the Hon ble Supreme Court in the case of Walfort (supra) that only the net of the income is taxable i.e. gross income minus expenditure and as discussed above the net income may be a loss also. Since the earning of positive net income is not a condition precedent for claiming deduction of expenditure, on the same analogy, the earning of exempt income is also not a condition precedent for attracting disallowance of expenditure incurred to earn exempt income. This position, only, has been reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suppose, for the sake of argument, the Hon ble Supreme Court on the interpretation of the old provision as the existed before the insertion of aforesaid explanation, holds that the disallowance is to be attracted even if no exempt income is earned by the assessee, can then it be canvassed that such verdict of the Hon ble Supreme Court would amount to change of law or of imposing any tax liability. It is settled position that the provisions as interpreted by the Supreme Court would mean that the same had the same meaning as interpreted by the Supreme Court right from the date of their insertion in this respective statute. In this case, without waiting for any interpretation of the provisions of section 14A by the Supreme Court declaring as to what is the real purpose and object and intention of the legislature in this respect, the legislature itself has given the explanation by way of insertion of the aforesaid explanation to clarify the real intent of the legislature is that the disallowance of expenditure u/s 14A does not depend upon the actual earning of the positive exempt income. Example can be given to the another recent amendment made by the Finance Act of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interpretation given by the Supreme Court, it is to be assumed that such intention of the legislature was always there to ascribe such meaning to the said provision right from the very beginning independent of the newly inserted explanation. In view of this, it cannot be said that by the insertion of explanation to section 14A has the effect of any change of law or to fasten any new liability upon the tax payers. It is only to make the intention of the legislature clear and to remove the confusion and doubts that has arisen pursuant to the aforesaid decisions of various High Courts. 37. So far as the contention of the Ld. Counsel for the assessee that in the case of CIT vs. Moderate Leasing and Capital Services Pvt. Ltd. (supra) the SLP against the order of Delhi High Court has been dismissed, therefore the said order has attained finality, it is to be noted that it has been held time and again by the apex court of the country that the dismissal of an SLP against an order or judgment of a lower forum is not an affirmation of the same. If such an order of the Supreme Court is non-speaking, it does not constitute a declaration of law under Article 141 of the Constitution or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not in any manner change this position. The Hon ble Supreme Court in the case of Maxopp Investment Ltd. (supra) has clearly held that before applying the theory of apportionment, the AO need to record satisfaction that having regard to the accounts of the assessee, suomoto disallowance u/s 14A was not correct. There is no change of this legal position even after introduction of the aforesaid explanation. 39. So far as the contention of the ld. Counsel for the assessee that the aforesaid explanation talks of only those cases where no exempt income has been earned and that the said explanation is not applicable to cases where the assessee has earned some exempt income, we do not find ourselves in agreement with the aforesaid proposition. Such a proposition may place the different assessees in inequitable position. In such scenario, in a case where an assessee does not earn any exempt income, he may suffer disallowance as per the formula prescribed under Rule 8D, whereas, in a case where an assessee earns some meagre exempt income, the disallowance in his case would be restricted to such meagre exempt income and the assessee having no exempt income will have to suffer more ..... X X X X Extracts X X X X X X X X Extracts X X X X
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