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TMI Blog2024 (6) TMI 983X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A read with Rule 8D. 2. That, without prejudice to the generality of ground of appeal no. 1, Ld. CIT(A) erred in: - a) Not appreciating that the petitioner had not received any dividend income or any other exempt income and in the absence of exemption of an income from the charge of tax the provisions of Section 14A could not be applied; b) Not appreciating that learned Assessing Officer had made disallowance of huge interest expenditure without arriving at a finding that the petitioner had employed borrowed funds for the acquisition of the shares in question; c) Not appreciating that the disallowance under Rule 8D was not automatic and it was incumbent upon learned Assessing Officer to record proper satisfaction on actual facts of the case that disallowance under Rule 8D was called and d) Erroneously applying the provisions of Explanation inserted by Finance Act 2022 to Section 14A whereas the Assessment Year under consideration is 2016-17. 3. That the appellant craves leave to reserve to himself the right to add to, alter or amend any of the aforesaid grounds of appeal before or at the time of hearing and to produce such further evidence, documents and papers as may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed case laws in support of its contention." 4. In order to proceed further and understand the matter in controversy para 5 of the Assessment Order is relevant and is reproduced as under: "5. Disallowance u/s 14A: 5.1 The assessee company Vide Notice u/s 142(1) issued on 19.08.2018 was asked to explain why provision of Sec 14A r.w.r. 8D are not applicable to you and why disallowance may not be made u/s 14A r.w.r. 8D of the LT.Rules. Further a show-cause notice were also issued on 07/12/2018, requesting the assessee to show cause as to why disallowance u/s 14A r.w.r 8D as worked out at amounting to Rs. 50,81,159/- shall not be made in your case. In response to the same the A R of the assessee filed its reply as follows: "We have not received any exempt income, hence provisions of Section 14A r.w.r. 8D of the IT Rules are not applicable to us. Without prejudice to the above, we further submit that we have purchased shares of Zodiac Developers Private Limited to acquired controlling interest in the subsidiary company viz. Zodiac Developers Pvt Ltd. Shares purchased by person as promoter, manager, or controller of companies is acquisition of shares for the purpose of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses in form of carrying costs, are incurred only to earn Dividend income. 5.2 Assessee's submission is considered but not found acceptable as the assessee submitted a general statement, without corroborating the facts with the financial statements of the assessee. The following facts were drawn from the Financial Statement of the assessee: (i) on perusal of the balance sheet of the assessee it was observe that the assessee had Non-Current Investment of Rs. 15,60,00,000/- as on 31/03/2016 and 31/03/2015 in the Equity Shares, out of the total of the assets side of Rs. 15,94,58,744/- as on 31.3.2016 and Rs. 15,72,01,787/- as on 31.03.2015. The income from the above investment may result into Dividend income which is exempt income (ii) The assessee had Short-term borrowing of Rs. 3,06,01,355 as on 31.03.2016 and Rs. 3,31,20,033 as on 31.03.2015. (iii) The assessee had Finance Cost of Rs. 43,65,629/- debited to the profit & loss account and other expense of Rs. 27,82,092/-. (iv) Revenue of the Assessee for the F.Y. 2015-16 consist of Sale of Services (Architect and Liaisoning fee) and Interest Income. (v) In view of the above fact, it is clearly shown that the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. A = Amount of Expenditure by way of Interest = Rs. 43,65,629/-. ii. B = Average of exempt income yielding investments = Rs. 15,60,00,000/- iii. C = Average of total assets as appearing in the balance sheet of the assessee = Rs. 15,83,30,265/- B. Average Value of Investments - = Opening balance of investments + Closing Bal. of investments = 15,60,00,000 + 15,60,00,000 = Rs. 15,60,00,000/- 2 C. Average value of Total assets = Opening balance of Total Assets + Closing Balance of Total Assets 2 5.6. In view of the above facts, Rs. 50,81,159/- is disallowed u/s. 14A and added to the total income of the assessee. This is the fit case for initiated of penalty u/s. 271(1)(c) of the Income Tax Act, 1961, as the assessee has furnished inaccurate particulars of its income. Therefore, penalty notice u/s. 271 (1)(c) of the I.T. Act, 1961 is issued for furnishing inaccurate particulars of income." 5. The Ld. CIT(A) had confirmed the order of the Ld. AO for the reasons mentioned in para 5.7 of Ld. CIT(A)order and is reproduced as under: "5.7 It would not be outer place to mention here that the Finance Act 2022 had amended section 14A. Most importantly the amendmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year in relation to such exempt income." 6. If we summarize the grounds of appeal, two questions arises for determination by this Tribunal as under: a. Whether disallowance can be made u/s. 14A r.w.r. 8D of the I.T. Rules, 1962 in the absence of exempt income for the relevant A.Y. 2016-17? b. Whether disallowance can be made under Rule 8D without satisfaction of the Ld. AO u/s. 14A or whether the explanation to section 14A inserted by Finance Act, 2022 can be made applicable retrospectively? 7. We have heard the Ld. AR on behalf of the assessee and Ld. DR on behalf of the revenue and also considered the facts and circumstances and the case referred and relied on behalf of appellant/assessee. The Ld. AR on behalf of the appellant/assessee has argued that: i. When no exempt income was earned in the financial year 2016, the addition u/s. 14A was not permissible. ii. The explanation inserted by Finance Act, 2022 in Section 14A cannot be applied retrospectively. iii. The Ld. AO has not specified any income therefore anticipated income cannot be called as taxable income. iv. The observation of the Ld. CIT(A) at page 13, para 5.7 of his ordershows that the Ld. CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03." * Case No. 3: SLP (Civil) Diary No(S). 13507 of 2019, Principal Commissioner of Income Tax Vs. GVK Project and Technical Services Ltd., [2019] 106 taxmann.com 181 (SC), dated 03.05.2019: "1. The Revenue's appeal is with respect to the disallowance made by the Assessing Officer ("AO") under Section 14A of the Income-tax Act, 1961 (hereinafter "the Act"). The AO had proceeded to calculate the disallowances based upon the investments made by the assessee. The CIT(A) and the Income Tax Appellate Tribunal (ITAT) allowed the assessee's appeals by following the ruling in "Cheminvest Ltd. vs. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi): the Court had then held that in the absence of any exempt income disallowance was impermissible. For the relevant Assessment Year (2013-14), concededly, the assessee did not report any exempt income. Consequently, no substanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bhatia v. State of U.P., (1981) 2 SCC 585, 598]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts". 18. There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India". The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, "income payable for service rendered in India". 19. When the Explanation seeks to give an artificial meaning to "earned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "[Explanation.-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.]" 5. However, a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: "4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the Ld. AO on the ground that the Finance Act, 2020 has amended Section 14A by adding explanation to section 14A of "the Act" to clarify that notwithstanding anything to contrary contained in this Act, the provisions of this Section shall apply and shall be deemed to have always applied in a case where the exempt income has not accrued or arisen or has not been received during the previous year relevant to an A.Y. and the expenditure has been incurred during the said previous year in relation to such exempt income. The Ld. CIT(A) has concluded in para no. 5.7 that the amendment has been made operational retrospectively to hold that even if no exempt income is earned, yet provision of Section 14A is appliable. 13. The Ld. AR on behalf of the assessee/appellant has vehemently argued that as noticed earlier that the said amendment in Section 14A is not applicable retrospectively and further that the assessee has sufficient funds apart from the borrowed amount carrying interest for investment in shares and as such the disallowances u/s. 14A was not warranted because no exempt income was earned in the previous year relevant for the concerned A.Y. 2016-17. 14. The Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) has committed illegality and perversity by relying the explanation to Section 14A brought into existence by the Finance Amendment Act, 2022 while giving retrospective effect to the said amendment which as has been held by the Hon'ble High Court of Delhi in M/s. Era Infrastructure (India) Ltd., (supra), to be not permissible. 19. In other words, the amendment in Section 14A is not applicable retrospectively to the previous A.Y. 2016-17. For the above reasons, the finding recorded by the Ld. CIT(A) while upholding the assessment order of Ld. AO are found to be perverse, not legally sustainable in the eyes of law and accordingly set aside. 20. Since the satisfaction of the Ld. AO for making disallowance u/s. 14A r.w.r. 8D was based on presumptions of earning dividend income in future, therefore, cannot be said to be based on the legally sustainable satisfaction. We therefore conclude that both the question no. 1 and 2 enumerated for consideration before this Tribunal are decided against the revenue and in favour of the assessee/appellant, the ground no. 1 and 2 of appeal are decided in favour of assessee. In view of decision on ground no. 1 and 2 in favour of assessee. The decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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