Case Law Details
Royal Orchid Hotels Ltd Vs ACIT (ITAT Bangalore)
ITAT Bangalore held that amendment to section 14A introduced vide Finance Act, 2022 is effective from 1st April 2022. The word ‘for removal of doubts’ cannot be presumed to have retrospective effect.
Facts-
Revenue has preferred the correct appeal mainly alleging that even if there was no exempt income received by the assessee still the AO can make disallowance u/s 14A r.w Rule 8D and he relied on the order of the AO. The amendment by the Finance Act 2021 is a retrospective in nature . The CIT(A) has wrongly interpreted the provision and allowed this ground of the assessee.
Conclusion-
Delhi High Court in the case of Pr. CIT (Central) vs. Era Infrastructure (India) Ltd. held that amendment of section 14A which is ‘for removal of doubts’ cannot be presumed to be retrospective even where such language is used, if it alters of changes the law as it earlier stood.
Held that there is nothing on record to suggest that the assessee has not earned any exempt income for the relevant assessment year. For the limited purpose of examination of the same, the matter is restored to the files of the AO. The AO on examination finds that there is no exempt income earned during the relevant assessment year, there shall be no disallowance u/s 14A of the IT Act. The AO shall decide the issue as per law laid down by the Era Infrastructure India Ltd., cited supra. It is ordered accordantly.
Further, AO observed that assessee has claimed an amount of Rs. 12,93,753/- towards software expenses under the head ‘miscellaneous expenses’.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These cross appeals have been filed by both, the assessee as well as revenue against the order of CIT(A)-5 dated 29/11/2017.
2. The Grounds of appeal filed by the assessee are as under:-
“1. The order of the CIT(A) is opposed to law and facts.
2. The credit card commission has been allowed in the earlier AY 2010-11 by the Income Tax Appellate Tribunal (ITAT). A copy of the ITAT order pertaining to the AY 2010-11 is produced herewith and marked as Annexure C.
3. The software expenses incurred by the Appellant are revenue in nature. A copy of the details of software expenses is produced herewith and marked as Annexure D.
4. For these and other reasons that may be adduced at the time of hearing, this appeal may be allowed.”
3. The Grounds of appeal filed by the Revenue are as under:-
“(1) Whether the learned CIT(A) was correct in law and in facts in holding that the processing fees and interest paid by the assessee on the loan taken for new Hyderabad Hotel project was allowable as revenue expenditure, despite, the fact that new Hotel has not been put to use and hence the conditions of the 2 proviso to Section. 36(1)(iii) of the Act had not been fulfilled ?
(2) Whether the learned CIT(A) was correct in law and in facts in holding that no I disallowance u/s 14A of the Act can be made because no exempt income has been earned during the year?
(3) Whether the learned CIT(A) was correct in law and in facts in holding that salaries which had been transferred to work in progress in the books of accounts are allowable as revenue expenditure?
(4) The Appellant craves leave to alter, amend or delete the above grounds of appeal or add any other grounds of appeal ?”
4. The brief facts of the case are that the assessee is engaged in the business of hospital industry filed its return of income on 30/09/2011 declaring a total income of Rs.10,67,98,868/-. The case was selected for scrutiny and statutory notices were issued to the assessee.
5. During the course of assessment proceedings, the assessee submitted various details as per the questionnaire of the AO. The AO observed that the assessee has claimed an amount of Rs.1,18,27,431/- as credit card commission under the head ‘commission, brokerage and discounts’. The assessee was asked to furnish the details. The assessee filed details and it was verified by the AO and he observed that the assessee had not deducted TDS as per the provision of sec. 194H on these payments. In respect of credit card payments, the assessee submitted that it was in the nature of bank charges and do not require TDS to be deducted from the payments made to the banks and he further submitted that the commission is confined to payment made to agents for affecting sales and carrying out business transaction and cannot extend to payments which are for services rendered for products offered on principal to principal basis. The expenditure offered by the assessee was not accepted by the AO and AO applied Explanation – 1 to section 194H of the Act and he relied on the judgment of CIT Vs. Singapore Airlines Ltd., and other Airlines, 213 ITR 441 and the decision of ITAT Ahmadabad Bench in the case of Canara Bank Vs. ITO and Bench 305 ITR (AT) 189. He also referred to the amendment made later on in section 194H also and 197A (1F). Accordingly the AO disallowed the entire credit card expenses of Rs.1,18,27,431/- for non deduction of TDS as per sec.40(a)(ia) referring to sec. 194H of the Act. Further the AO observed that the company has claimed an amount of Rs.12,93,753/- towards software expenses under the head ‘miscellaneous expenses’. The assessee was asked to furnish the details of the same and on verification of the details, it was observed by the AO that these expenses were valued towards purchase of software and software licenses. The AO noticed that the expenditure is an enduring in nature and not to limit to one financial year and the license fee is paid for every year. If the assessee did not pay the license fee in the beginning of the year, the validity of the license stretches more than 1 year. Accordingly, he treated it as capital expenditure and allowed depreciation as per eligibility for the rate of depreciation and rest of the amount was added back into the total income of the assessee. The AO observed that the assessee has taken corporate term loan from IDBI bank and for which the processing and interest has been deduced at Rs.1,61,14,980/- in his computation of income. The assessee submitted that these expenses have been capitalized towards hotel project at Hyderabad and assessee was asked for substantiate with these amounts why the assessee has taken it as revenue expenditure. In response, written submission was filed by the assessee during the course of hearing wherein, it was stated that the company had taken a corporate loan of Rs.50 crores from IDBI bank towards augmenting the additional working capital requirements of the company. It was further submitted that the loans shown/taken were utilized by various units of the company and further submitted that since the loan was taken for the working capital requirement of the company, therefore, it is in the nature of revenue expenditure and the assessee cited various judicial precedents. The submission of the assessee were examined by the AO and he also relied on the judgment of Hon’ble Supreme Court in the case of India Cements Ltd., Vs. CIT and accordingly the AO was not agreed for treating it as a revenue expenditure and added into the total income of the assessee.
6. Further AO noted that there is an investment of 1,17,99,19,085/- as on 31/03/2011 in various equity shares and securities and income from these investments are not form part of the total income of the assessee. The assessee was asked as to why the disallowance u/s 14A r.w Rule 8D should not be made. In response, the assessee submitted that the assessee has not incurred any expenditure in respect of earning of exempt income. The AO has not accepted claim of the assessee and he calculated the disallowance as per Rule 8D and disallowance was made as sec.14A of Rs.57,21,330/-.
7. Further the AO observed that the assessee had claimed deduction amounting to Rs.1,03,47,558/- with the narration ‘salaries transferred to work in progress’. In this regard, the assessee was asked to furnish details of allow ability of this In response, the assessee submitted that salary paid to Sr. executive amounting to Rs.1,03,47,458/- were capitalized in the books of accounts towards expansion of the business in Hyderabad and findings is as under:-
“The contention of the assessee company are examined and found to be not acceptable:
The assessee company itself has capitalized the expenditure relating to salaries. The financial statements of the company had been certified by the directors and auditors of the company to be depicting the true and fair view of the affairs of the company. The assessee company could not substantiate any reason for treating the amount differently in its financial statement and in the statement of the computation.
ii) The company has not been able to substantiate that the services of the concerned employees were not utilized for the purpose of the project in Hyderabad. The salaries in question may be in respect of the senior executives, but it has to appreciated that the project taken up by the assessee company in Hyderabad is a very big project wherein the services of the senior executives are also necessary.
iii) The judicial decisions cited by the assessee company are different in facts than that of the assessee and not relevant to the facts of the assessee company.”
8. Aggrieved from the order of the AO, the assessee filed appeal before the CIT(A), who after considering the detailed written submissions and arguments of the assessee partly allowed the appeal of the assessee.
9. Feeling aggrieved from the order of the CIT(A), both parties are in appeal before the ITAT.
We are taking the appeal of the assessee appeal first.
10. The ld.AR reiterated the submissions made before the lower authorities and further submitted that the credit card commission for the preceding assessment year 2010-11 has been decided by the Hon’ble bench of the Tribunal in assessee’s own case in ITA No.846/Bang/2015 in favor of the assessee. Therefore, he requested that the same decisions may be followed.
11. The assessee did not press ground No.3 during the course of hearing, hence it is dismissed as not pressed.
12. The ld. DR relied on the order of the lower authorities.
13. After hearing the rival submissions, perusing the entire material on record and examining the orders of the lower authorities, we observe that the similar issue regarding credit card commission has been decided in assessee’s own case in the assessment year 2010-11 in ITA No.846/Bang/2015, the relevant part of the order is as under which is decided in favor of the assessee:-
“9. Vide its ground 3, grievance raised by the Revenue is that CIT (A) deleted the disallowance made by the AO on credit card commission.
10. Facts apropos are that assessee had paid Rs. 1,46,36,138/- to the bank for credit / debit card payment realization., AO was of the opinion that such payments fell within the ambit of commission and therefore Section 194H of the Act stood attracted. As per the AO, relationship between the bank and the merchant was established under the merchant contract and hence contention of the assessee that bank was acting on behalf of card holder was incorrect. AO also noted that CBDT vide Notification No.56/2012, dt. 13.12.2012 exempted seven services from the rigors of ‘deducti6n of tax at source with effect from 01.01.2013 and hence according to the A10 i1or to that date, such payments fell within section I94H of the At Since the assessee had not deducted tax, AO had applied section 40(a)(ia) of the Act and made a disallowance of Rs.1,46,13,188/-
11. In its appeal before the CIT (A), argument of the assessëe was that what was released by the banks was the net amount and assessee had not paid any direct commission to the bank. Bank itself had retained their charges out of the payments received from customers and passed on only the balance to the assessee. Reliance was placed by the assesse on the decision of the Hyderabad bench of this Tribunal in the case of DOT v. MIs. Vah magna Retail Ltd [I.T.A.No,l 105/Hyd/2011, dt.10.04.20121. CIT(A) was appreciative of these contention’s. According to him, coordinate bench in the case of Tatà Teléservices Ltd V. DCIT (TDS) [(2013) 140 lTD 4511, had held as under:’ “3.5 In light of the aforesaid decision of the Hon ‘ble Hyderabad Bench, we-are of the view that payments to. on account of utiisation of credit card facilities would be in the nature of bank charge and not in the nature of commission within the meaning. of sec. 19411 of the Act. We, therefore, confirm the order of the CIT (Appeals) on this issue and dismiss the appeals of the Revenue.”
He deleted the disallowance.
12. Now before us, Ld. AR strongly assailing the order of CIT (A) submitted that commission payments fell within section 194H of the Act. According to him, assessee having not deducted tax at source on such commission payments, Section 40(a)(ia) automatically stood attracted.
13. We have perused the orders and heard the contentions of the Ld. DR. Grounds raised by the Revenue relies on CBDT notification No.56/2012, dt.3 1.12.2012 which exempts certain types of payment from deduction of tax at source. Said notification has been issued under powers vested on the central government vide Section 197A(1D) of the Act. No doubt one of the type of payments mentioned in the above circular is credit card/ debit card commission on transactions between merchant establishment and acquirer bank. Notification was effective from 01.01.2013. But in our opinion this notification cannot be construed in a manner to say that prior to 01.01.2013 charges deducted by the bank from credit card payments received from’ customers of the assessee fell within the purview of Section 194H for warranting a deduction of tax at source. As mentioned by CIT (A), coordinate bench in the case of Tata Teleservices (supra) had clearly held that such payments were more in the nature of bank charges than in the nature of commission and Section 194H1of the Act would not be attracted. In such circumstances, we do not find any reason to interfere with the order of CIT (A). Ground 3 stands dismissed.”
14. The above cited appeal was filed by the Revenue and which was dismissed as stated above. Therefore, respectfully following the above decision in favor of the assessee, we allow ground No.2. ]
15. Ground No.1 and 4 is general in nature and does not require
16. In the result, the appeal of the assessee is partly allowed. Now we come to the appeal of the Revenue in ITA No. 1187/Bang/2018
17. In respect of ground No.1, the ld. DR relied on the order of the AO and he submitted that the CIT(A) has wrongly allowed this issue in favor of the assessee.
18. Further in respect of ground No.2, the ld. DR submitted that even if there was no exempt income received by the assessee still the AO can make disallowance u/s 14A r.w Rule 8D and he relied on the order of the AO. The amendment by the Finance Act 2021 is a retrospective in nature . The CIT(A) has wrongly interpreted the provision and allowed this ground of the assessee.
19. In respect of ground No.3 he relied on the order of the AO and he submitted that the AO has rightly disallowed the revenue expenditure claimed by the assessee whereas it is in the nature of capital in nature. The assessee could not prove that it is a revenue Therefore, the order of the AO should be restored.
20.. The ld.AR of the assessee relied on the order of the CIT(A) and he submitted that CIT(A) has examined the issue in detail after considering the detailed written submission filed during the appellate proceedings. Therefore, he requested that the order of the CIT(A) should be accepted on these 3 issues.
After hearing the rival submission, perusing the entire material on record and examining the orders of the lower authorities, we observe that the CIT(A) has rightly decided the ground No.1 raised by the Revenue in favor of the assessee, which is as under:-
“7. Ground no.4 is related to processing fees & interest of Rs. 1,61,14,980/-. The Assessing Officer has given a finding that the appellant company has capitalized the expenditure relating to processing fees and interest in its balance sheet. The financial statements of the company had been certified by the directors and auditors of the company to be depicting the true and fair view of the affair of the company. The appellant company could not substantiate any reason for treating the amount differently in its financial statements and in the statement of computation. The appellant company has not been able to substantiate that the loan raised was actually utilized for the purpose of working capital of the company and not for the Hyderabad hotel project with supporting evidences. Although the purpose stipulated at the time of raising of the loan may be for the working capital of the company but the actual utilization of the amount for the purpose of working capital could not be substantiated. Banks are ultimately interested in whether the loans are backed by the security offered to them. Further observed that the judicial decisions cited by the appellant company during the assessment proceedings are different in facts of that of the appellant. In the decision of the Hon ‘ble Supreme Court in the case of India Cements Ltd. Vs. CIT, the issue was stamp duty paid on issue of debenture. Similarly other judicial decisions relied on by the appellant are also not relevant to the facts of the appellant company. During the appellate proceedings the AR submitted that upfront fees were paid to bank towards process fees for loans taken from them. This loan was taken for the purpose of the business of the appellant and it was exclusively used for that purpose. Hence, the same is allowable uls.37 of the Act. Such upfront fees is inter linked with the interest expense because it is paid towards process fees for such borrowed. Further submitted that the books of account and income tax computation are two different things and that the former is governed by the Companies Act, 1956/2013, while the latter governed by the Income Tax Act 1961. There are many instances of both income and expenses that are treated differently under the two Acts above and one need not necessarily follow the other. The appellant relied on the Hon ‘ble Kolkata Tribunal’s in the case of Sarat Chatterjee & Co. Pvt. Ltd. Vs. ACIT wherein it was held that upfront fee for term loan and pre-payment penalty charges incurred in relation to obtaining bank loans to finance procurement of heavy machinery were purely in the nature of revenue expenditure. Disallowance of processing charges is against law as the nature of expense in the appellant’ case is similar to the expense incurred in the case of India Cement Ltd. Vs. CIT, 60 ITR 52 wherein it was held that amount spent towards stamp duty, registration fees and lawyer fees for creating charge on fixed assets were held to be revenue nature. It is the substance of the expenses that need to be looked into and not the nomenclature used while following judicial pronouncements. Placing reliance on above, it was held by the ITAT, New Delhi in K.S.S. Abhishek Safety Systems Pvt. Ltd, Vs ACIT that processing charges resulting in long term benefit and related to creation of capital assets are nevertheless allowable as revenue expense. The Hon ‘ble Madras High Court in its decision rendered in the case of Shree Meenakshi Mills 290 ITR 107 has held that upfront fees paid for obtaining loan for purchase of machinery is revenue expenditure. The Hon ‘ble Supreme Court in the case of CIT Vs Akkamba Textiles, 227 ITR 464, similarly held that processing charges are revenue in nature. The on Hon ‘ble Supreme Court in DCII Vs. Core Health Care Ltd. reported in 298 ITR 194 overlooked the decision on the Punjab & Haryana High Court rendered in the case of CIT Vs. Vard man Polytec Ltd. wherein it was held that if capital was borrowed for establishment of a new unit then interest expenses would not be an allowable deduction. As the Supreme Court judgement is latest and supersedes the Punjab & Haryana High Court, such expense need not be capitalized. According to these decisions, the upfront fees charged by the banks on process of loan are not a capital expenditure. It is similar to that of interest expense.
Therefore, taking into consideration the authoritative pronouncements of Hon ‘ble Supreme Court in the case of Core Health as well as the decision of Hon’ble Madras High Court in the case of Shree Meenakshi Mills Ltd both interest and processing charges incurred by the appellant company and treating the same as revenue is fully justified notwithstanding the fact that the appellant has chosen to capitalize the same in books as per the Companies Act, 1956, whilst the claim for allowabiity is made under the Income Tax Act 1961. The ground is hereby allowed.”
21. After going through above findings of the CIT(A), we do not find any infirmity in the order of the CIT(A) and this issue is also covered by the judgment of Hon’ble Supreme Court in the case of Vardhman Polytex Ltd. Vs. CIT reported in [2012] 25 com 281 in favour of the assessee. Therefore, we dismiss this ground of the Revenue.
22. With respect to ground No.2, the CIT(A) has also allowed this issue at para no. 8 of his order but on the entire order, the assessee as well as the CIT(A) has nowhere mentioned that there is any exempt income earned by the assessee or not. During the impugned assessment year, the assessee has also not submitted before us computation of income as well as the financial statements so that it can be concluded that there was any exempt income or not for the impugned assessment year. The ld.AR submitted that the assessee has not received any exempt income therefore no addition can be made as decided by the various upper courts. The ld.DR submitted that there is an amendment has been made by Finance Act on 2022 by inserting Explanation for removing the doubts, this explanation has been dealt by Delhi High Court in the case of Pr. CIT (Central) Vs. Era Infrastructure (India) Ltd. reported in [2022] 141 taxmann.com 289. The relevant part is as under:-
“4. Learned counsel for the petitioner also submits that in view of the amendment made by the Finance Act, 2022 to section 14A of the Act by inserting a non obstante clause and an explanation after the proviso, a change in law has been brought about and consequently, the judgments relied upon by the authorities below including IL&FS Energy Development Co. Ltd. (supra) are no longer good law. The amendment to Section 14A of the Act is reproduced hereinbelow:—
‘Amendment of section 14A.
In section 14A of the Income-tax Act,—
(a) in sub-section (1), for the words “For the purposes of, the words “Notwithstanding anything to the contrary contained in this Act, for the purposes of shall be substituted;
(b) after the proviso, the following Explanation shall be inserted, namely:—
“[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 herein below:
“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 always applied in a case where exempting come 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 exemption come.
5. This amendment will take effect from 1st April, 2022.
6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.
7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-2 3 and subsequent assessment years.” (emphasis supplied)
6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 has held that a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced herein below:
‘9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us.
10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau.)]. It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318) “[I]t is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has (sic) somehow remained pending on 1-4- 1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessee. This fortuitous circumstance cannot take away the vested rights of the assessee at hand. “
11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years.
12. In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read:
“Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for—
(a) service rendered in India; and
(b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India.”
The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change.
13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court’s decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1 -4-1979. It was held that since the Explanation came into force from 1 -4-1979, it could not be relied on for any purpose for an anterior period.
14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608] .)
15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4-2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) : (1995) 215 ITR 165]. It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 2 and 5.3.
“5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India.
5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years”.
16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it.
17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. 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”.’ (emphasis supplied)
7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced herein below:—
“22. Second, a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows :
17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585]. 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; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482]. 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 SG. 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 India” and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.” (emphasis supplied)
8. Consequently, this Court is of the view that the amendment of section 14A, which is “for removal of doubts” cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.
9. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed v. State of Kerala [2000] 113 Taxman 470/245 ITR 360 and Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association [1992] 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in IL & FS Energy Development Co. Ltd. (supra) and Cheminvest Ltd. v. CIT [2015] 61 com 118/234 Taxman 761/3 78 ITR 33 (Delhi).
10. Accordingly, the appeal and application are dismissed. However, it is clarified that the order passed in the present appeal shall abide by the final decision of the Supreme Court in the SLP filed in the case of IL & FS Energy Development Co. Ltd. (supra).
23. As mentioned earlier, there is nothing on record to suggest that the assessee has not earned any exempt income for the relevant assessment year. For the limited purpose of examination of the same, the matter is restored to the files of the AO. The AO on examination finds that there is no exempt income earned during the relevant assessment year, there shall be no disallowance u/s 14A of the IT Act. The AO shall decide the issue as per law laid down by the Era Infrastructure India Ltd., cited supra. It is ordered accordantly.
24. Ground No.3 has been decided by the CIT(A) at para No. and he has allowed the appeal of the assessee against which the Revenue has filed appeal and the ld. DR relied on the order of the AO and submitted that the assessee is unable to produce any credential evidence for substantiating his case that it was revenue in nature. Therefore, he requested that the order of the AO should be restored and he submitted that the case law relied on by the CIT(A) is not applicable in the present set facts of the case and also the details are not submitted by the assessee.
25. The ld.AR relied on the order of the CIT(A).
26. After hearing the rival submission, perusing the entire material on record and examining the orders of the lower authorities, we observe that the AO has observed that the assessee itself has capitalized in the financial statements to the expenditure incurred but the assessee has claimed it as a revenue expenditure and the assessee also could not justify that this expenditure is in the nature of revenue expenditure before us. Therefore, the AO has rightly treated it as capital expenditure after observing the submissions of the assessee that the salary paid towards the expansion activities in Hyderabad, the capital expenditure incurred by the assessee is not allowable u/s 37(1)of the Act. Therefore, we uphold the order of the AO and reverse the order of the CIT(A).
27. In the result, this ground is allowed.
28. In the result, both the appeal of the Revenue as well as of the assessee is partly allowed. A copy of order be placed on the respective case files.
Order pronounced in court on 20th day of September, 2022
Author Bio
