Case Law Details
Adani Green Technology Limited Vs PCIT (ITAT Ahmedabad)
The appeal was filed by the assessee against the order of the Principal Commissioner of Income Tax (PCIT), Ahmedabad-1, passed under section 263 of the Income-tax Act, 1961 for Assessment Year 2018–19. The dispute concerned the PCIT’s action in revising the assessment order passed by the Assessing Officer (AO) under section 143(3) read with sections 143(3A) and 143(3B) of the Act.
During review of the assessment records, the PCIT observed that the assessee had made substantial investments in shares and securities that could potentially generate exempt income under section 10(34) of the Act. The PCIT also noted that the assessee had claimed total expenses, including financial costs of ₹20,36,767, in its profit and loss account. However, the assessee had not made any disallowance under section 14A read with Rule 8D of the Income-tax Rules. According to the PCIT, CBDT Circular No. 05/2014 dated 11 February 2014 required disallowance under section 14A even in cases where no exempt income had been earned. On this basis, the PCIT concluded that the AO had passed the assessment order without conducting necessary verification or inquiries. Accordingly, the PCIT set aside the assessment order and directed the AO to conduct fresh assessment after proper inquiry.
The assessee challenged the revision before the Tribunal, contending that no exempt income had been earned during the relevant assessment year and therefore the provisions of section 14A read with Rule 8D were not applicable. In support of this argument, the assessee relied on the judgment of the jurisdictional High Court in CIT vs. Corrtech Energy Pvt. Ltd., which was subsequently upheld by the Supreme Court in CIT vs. Chettinad Logistics Pvt. Ltd.
The Departmental Representative argued that the AO had failed to conduct proper inquiries during the assessment proceedings and therefore the PCIT had validly exercised revisional jurisdiction under section 263. Reliance was placed on a decision of the Bombay High Court in Vedanta Ltd vs. CIT.
After considering the submissions and examining the record, the Tribunal observed that for invoking revisionary jurisdiction under section 263, two conditions must be satisfied: the assessment order must be erroneous and it must be prejudicial to the interests of the revenue. If either of these conditions is absent, revision under section 263 cannot be sustained.
The Tribunal noted that it was an undisputed fact that the assessee had not earned any exempt income under section 10(34) during the relevant year. Courts have consistently held that disallowance under section 14A read with Rule 8D cannot be made where no exempt income is earned. The Tribunal relied on the judgment of the jurisdictional High Court in Corrtech Energy Pvt. Ltd., which held that section 14A has no application where the assessee has not claimed any exempt income. This principle was later approved by the Supreme Court in Chettinad Logistics Pvt. Ltd.
The Tribunal also addressed the amendment introduced by the Finance Act, 2022 inserting an Explanation to section 14A stating that disallowance may apply even if exempt income has not been received. The Tribunal observed that the amendment is effective from 1 April 2022 and applies from Assessment Year 2022–23 onwards. Relying on judicial precedents, including the Delhi High Court decision in Era Infrastructure (India) Ltd., the Tribunal held that the amendment cannot be applied retrospectively as it changes the earlier legal position.
The Tribunal also found that the decision relied upon by the Revenue was distinguishable on facts.
In view of these findings, the Tribunal concluded that there was no error in the assessment order causing prejudice to the revenue. Consequently, the revisional order passed by the PCIT under section 263 was quashed.
The appeal filed by the assessee was therefore allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Principal Commissioner of Income Tax, Ahmedabad-1, arising in the matter of the order passed under s. 263 of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2018-2019.
2. The only grievance raised by the assessee is that the Ld. PCIT u/s 263 of the Act erred in holding the assessment framed by the AO u/s 143(3) of the Act. r.w.s. 143(3A) and 143(3B) of the Act, as erroneous in so far prejudicial to the interest of revenue.
3. The Ld. PCIT, on perusal of the assessment records, found that the assessee has made huge investment in shares and securities which can generate exempted income u/s 10(34) of the Act. Likewise, the Ld. PCIT also found that the assessee has claimed total expenses in the profit and loss accounts including financial cost amounting to Rs. 20,36,767/- only. However, assessee has not made any disallowance under the provision of section 14A r.w. Rule 8D of Income-tax Rules which was compulsory to have been made in pursuance to the CBDT Circular No. 05/2014 dated 11/02/2014, even in a situation when the assessee has not earned any exempted income. Thus, the Ld. PCIT was of the view that the assessment has been framed by the AO without necessary verification and inquiries which should have been made. Accordingly, the Ld. PCIT set-aside the Assessment Order and directed the AO to frame the assessment afresh after necessary inquiries.
4. Being aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us.
5. The Ld. AR before us filed a paper book running from pages 1 to 64 and contended that there was no exempted income received by the assessee in the year under consideration and therefore the question of disallowance under the provision of section 14A r.w. Rule 8D of Income-tax Rules does not arise. The Ld. AR in support of his contention relied on the judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Corrtech Energy Pvt Ltd. reported in 223 taxman 130 which was subsequently upheld by the Hon’ble SC in the case of CIT vs. Chettinad Logistic Pvt. Ltd. Vs reported in 95 com 250.
6. On the other hand, the Ld. DR submitted that the assessment has been framed by the AO without proper inquiries and therefore the action taken by the Ld. PCIT u/s 263 of the Act, is well within his jurisdiction. The Ld. DR in support of his claim has relied on judgment of the Hon’ble Bombay High Court in the case of Vedanta Ltd vs. CIT reported in 124 com 435.
7. We have heard the rival contentions of both the parties and perused the materials available on record. In revising the Assessment Order u/s 263 of the Act, the twin conditions need to be satisfied being erroneous in so far prejudicial to the interest of revenue. If any of the condition is missing, then the assessment cannot be revised u/s 263 of the Act. Admittedly, in the given case, there is no exempted income u/s 10(34) of the Act for the year under consideration. The Hon’ble Courts time and again held that there cannot be any disallowance under the provision of section 14A r.w. Rule 8D of Income tax Rules in a situation where there is no exempt income earned by the assessee. We also rely on the judgment of Hon’ble Jurisdictional High Court in the case of Corrtech Energy Pvt. Ltd (Supra) wherein it was held as under:
In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under:
“7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application.”
5. We do not find any question of law arising, Tax Appeal is therefore dismissed.
8. The view taken by the Hon’ble Jurisdictional High Court in the above cited case has been subsequently approved by the Hon’ble SC in the case of \M/s Chettinad Logistics Pvt. Ltd.(supra). The head note of the judgment of Hon’ble Supreme Court reads as under:
Section 14A, of the Income-tax Act, 1961, read with rule 8D of the Income-Tax Rules, 1962 – Expenditure incurred in relation to income not includible in total income (General principle) – Assessment year 2011-12 – High Court by impugned order held that section 14A can only be triggered, if, assessee seeks to square off expenditure against income which does not form part of total income under Act; rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which does not form part of total income of assessee and it cannot go beyond what is provided in section 14A – It further held that where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 14A could not be invoked – Whether SLP against said impugned order was to be dismissed – Held, yes [Para 1] [In favour of assessee]
8.1 Now it has become law of the land by virtue of the findings of the Hon’ble SC that there cannot be any disallowance u/s 14A r.w. Rule 8D of Income-tax Rules in a situation where the assessee has not earned any exempted income until and unless there is some change under the provisions of law. The fact that the assessee has not earned exempt income has nowhere been disputed by the Ld. DR appearing on behalf of the revenue. Accordingly, we hold that there is no error causing any prejudice to the interest of revenue in the assessment framed u/s 143(3) of the Act.
8.2 At this stage, it is necessary to deal with the amendment under the provision of section 14A of the Act by way insertion of an explanation clarifying that the disallowance needs to be made under section 14A of the Act even there is no exempt income earned by the assessee. However, we find that such amendment is not applicable for the year under consideration by virtue of the order of the ITAT in the case of DCIT Vs. M/s CLP India Pvt. Ltd. in ITA No. 290/AHD/2020 for the AY 2015 vide order dated 4-11-2022 wherein it was held as under:
7. The other arguments of the Ld. D.R. namely the Amendment namely insertion of Explanation to Section 14A made by the Finance Act 2022 will be applicable retrospective. This argument of the Ld. D.R. does not hold it good as the very recent Delhi High Court Judgment in the case of Era Infrastructure (India) Ltd. (cited supra) wherein the Hon’ble Court held as follows:
3. He submits that the ITAT erred in relying on the decision of this Court in PCIT vs. IL & FS Energy) Development Company Ltd., 2017 SCC Online Del 9893 (wherein it has been held that no disallowance under Section 14A of the Act can be made if the assessee had not earned any exempt income), as the revenue has not been accepted the said decision and has preferred an SLP against the said decision.
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 PCIT vs. IL & FS Energy Development Company 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 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 provisions of this section 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 the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.
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 2022-23 and subsequent assessment years.”
(emphasis supplied)
6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 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 saidjudgment 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 14-1979 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 assessees. This fortuitous circumstance cannot take away the vested rights of the assessees 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(l)(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(l)(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(l)(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(l)(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. S.R. Patton [(1998) 8 SCC 608]).
15. Given this legislative history of Section 9(l)(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. Pate/ 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 14-91999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 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 a/so 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 U.P., (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. Commissioner of Income Tax, Delhi-Ill, 2021 SCC Online SC 575. The relevant portion of the said judgment is reproduced hereinbelow:-
“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 U.P., (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(l)(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 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.”
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.
7.1. Respectfully following the above judicial principles the insertion of Explanation to Section 14A by the Finance Act, 2022 is operative only from the Assessment Year 2022-23 onwards and not applicable for the earlier Assessment Years and therefore the argument of the Ld. D.R. is hereby rejected.
8.3 At the time of hearing the ld. DR has referred the judgment of Hon’ble Bombay High Court in the case of M/s Vedanta Ltd (supra) but we find that the same is distinguishable from the facts of the present case, thus we humbly hold the same cannot be made applicable to the given facts of the present case.
8.4 In view of the above, we quash the revisional order passed by the Ld. PCIT u/s 263 of the Act. Hence, the ground of appeal of the assessee is hereby allowed.
9. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Court on 20/10/2023 at Ahmedabad.
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