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TMI Blog2022 (7) TMI 1044X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. We note that when Mr. Rajesh Sidhwani was confronted with the statements of these four employees, he had emphatically denied being involved in any such provision of cash for liaisoning work and gratifications. Effect of the retraction affidavits - As noted that the retraction affidavits had been sworn before the Notary Public (within seven days of the original statement) and were submitted before the AO (albeit late). We note that after perusal of the retracted affidavits, the AO had summoned all the four employees and cross-examined them under oath. Copies of their statements recorded upon cross examination by the AO have been placed before us. Having perused the same, it is noted that each of the four employees withstood the cross examination. And each of them stood by their retraction and re-affirmed that their original statements were obtained under duress and coercion. AO tried to but failed to extract any information or detail whatsoever in the cross-examination which would in any manner support his AO s allegation that gratuitous payments in cash were being made by the assessee. On these facts, we are unable to agree with the Ld. CIT-DR that the retraction state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re against the orders of the Ld. CIT(A)-52, Mumbai dated 07-06-2021 for AYs 2012-13 to 2018-19. Since the issues involved are the same, all the appeals were heard together. Both the parties also argued them together raising similar arguments on these issues. Accordingly, for the sake of brevity, we dispose all the appeals by this consolidated order. 2. Before we advert to the grounds taken in the appeals, it would first be relevant to cull out the facts of the case in brief. Search u/s 132 of the Income-tax Act, 1961 (hereinafter the Act ) was conducted against the K Raheja Group, on 30-11-2017. Having regard to the date of search, the AO was within his jurisdiction to issue notices u/s 153A of the Act in respect of six assessment years preceding the assessment year of search i.e. in the present case, search took place in AY 2018-19, so, the AO was empowered u/s 153A of the Act to reopen six assessment years immediately preceding the searched assessment year and those AYs were AYs 2012-13 to 2017-18. It was pointed out that, prior to the date of search, the income-tax assessment u/s 143(3) of the Act for AY 2012-13, 2013-14, 2014-15 2015-16 were completed on 26.03.2015, 21.03 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees who had given their statements during the course of search proceedings u/s 132(4) of the Act for the reasons that the statement given by them under coercion and threat, however, they failed to give any evidence of the reason given by them for their retraction. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made u/s 69 of the Act without appreciating the decision of the Hon ble Apex Court in the case of Bannalal Jat Construction (P) Ltd Vs Assistant Commissioner of Income-tax wherein it had been held that the statement recorded during the course of search action which was in presence of independent witnesses having overriding effect over the subsequent retraction. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance u/s 14A of the IT Act as there was no exempt income received by the assessee during the year under consideration without appreciating the Circular No. 5 of 2014 dated 11.02.2014 of CBDT 4. First, we will take up Ground Nos. 1 to 3 which are common in all the years wherein the Revenue has assailed the action of the Ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Notary Public on 15.12.2017. It was further pointed out by the assessee that, had it been a case that the assessee was regularly handling cash for liaison work, then excess cash ought to have been found on the date of search. According to the assessee, however, the physical cash found by the Investigating authorities and the cash as per the books of accounts reconciled, and that there was no excess cash found. It was thus contended by the assessee that, the statements of these four employees were not reliable as they were not backed by any corroborative evidence and therefore no addition was warranted. In this factual background, the AO summoned each of these four employees who had retracted their statements and cross-examined them on oath. Upon examination, each of these employees stood by their retraction statements and stated that the statements u/s 132(4) of the Act were recorded under duress and coercion. They affirmed that there were no cash favours extended by them for undertaking liaisoning work. The AO however did not agree with the same. Primarily relying on the statement of Mr. Chandan, the AO concluded that the assessee was indeed incurring cash expenses of Rs.40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary public and not before the AO and that the subsequent statements given by these employees before the AO were only an after-thought. According to him, the delay in furnishing the retraction statements before the AO cast doubt on the genuineness of the retraction itself and therefore, according to him, these retraction statements deserve to be ignored. He thus contended that the AO had rightly taken note of the statements recorded u/s 132(4) of the Act to make the additions u/s 69C of the Act. According to the Ld. CIT-DR, the modus operandi revealed by the four employees of the assessee clearly showed that this liaison activity and consequent cash payments had being going on for a long time and therefore the AO had rightly inferred that these gratuitous payments of Rs.40 lakhs per month tendered to the officials for getting the approvals for the projects had been made in earlier years as well. So, according to Ld. CIT-DR, the AO had rightly extrapolated the addition of Rs.4,80,00,000/- made u/s 69C of the Act in AY 2018-19 in earlier years as well. He thus contended that the order of the Ld. CIT(A) be reversed and that of the AO be restored. Per contra, the Ld. AR appearing on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence ? Evidence is a mode or means to prove a fact-inissue. Statement is an oral testimony of relevant fact; and an admission of a factin-issue is an important piece of evidence provided it has been voluntarily given without any inducement, promise, threat or coercion. If it is tainted by any of these physical or mental influences, then the statement loses its probative value and it is not safe to rely solely on the basis of it. Once a statement recorded of a person who is in possession of any valuable thing or control of books found during search then it can be used as evidence in any proceedings under the Act and the presumption would be that it has been given by that person voluntarily. The burden to prove that the statement is not voluntarily obtained, but due to threat, coercion, promise etc, is upon the maker of statement. And such a burden would be discharged, if the maker of the statement is able to create reasonable doubt that the admission made in respect of fact-in-issue was not voluntary or was obtained by threat or coercion or inducement, then the onus shifts on the shoulder of Revenue to prove that statement was taken voluntarily. For that it is always emphasized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect facts and thus retraction can be discarded. Otherwise, an addition made solely on the basis of a statement which has been subsequently retracted, and is not backed by corroborative evidence, may not be sustainable. For this, we may gainfully refer to the Instruction F.No.286/2/2003-IT (Inv. II), dated 10-3-2003 issued by the CBDT to the Assessing Officers: Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of search and seizure and survey operations. Such confession, if not based upon credible evidence, are later retracted by the concerned assessee while filing returns of income. In these circumstances, such confessions during the course of search and seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. Similarly, while recording statement during the course of search and seizure and survey operations no attempt should be made to obtai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her their subsequent retractions could be entertained or not. In the present case, it is noted that the K Raheja Group was subjected to search action u/s 132 of the Act on 30-11-2017 which went on for seven days and was concluded on 06-12-2017. The Ld. AR took us through the original statements of each of the four employees, from which it is noted that these employees had been interrogated over several days and the chronological sequence of the statements showed that they had been continuously questioned over several days. For instance, Mr. Nikhil Mehta (VP-Architect) was being examined from the date of search, i.e. 30.11.2017, and his statement was recorded over several days and the interrogation finally concluded after four days i.e. 03.12.2017. Similarly, Mr. Anand Chandan (Associate VP-Finance) whose statement forms the basis of the impugned addition, was continuously questioned over three days (began on 02.12.2017 and ended on 04.12.2017). The Ld. AR pointed out that Mr. Amogh Patankar, who was on leave and in Kolhapur on 01.12.2017, had been summoned by the Investigating Officer and that after travelling continuously for several hours, he had reached the office at 4 p.m. He w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at odd hours were held to be taken under duress, particularly when such statement was not backed by any corroborative material or evidence found in the course of search. The relevant findings are as follows: 22 ..It is true that in normal circumstances this Court would not interfere in the finding of fact arrived at by the authorities. It is, however, to be seen as to whether the explanation tendered by the assessee would be considered by the authorities below. It is also to be seen as to whether an addition made is merely based on the statement recorded by the Assessing Officer under section 132(4) of the Act and whether any cognizance may be taken of the retracted statement. So far as case on hand is concerned, the glaring fact required to be noted is that the statement of the assessee was recorded under section 132(4) of the Act at mid night. In normal circumstances, it is too much to give any credit to the statement recorded at such odd hours. The person may not be in a position to make any correct or conscious disclosure in a statement if such statement is recorded at such odd hours. Moreover, this statement was retracted after two months. 23. The main grievance of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noring the retraction made by the assessee. 11. The Ld. AR thereafter took us through the contents of the original statements of these four employees to demonstrate the factual infirmities and inconsistencies therein, which according to the Ld. AR, showed that they were recorded under duress and undue influence. It was brought to our notice that, Mr. Nikhil Mehta was the Vice President, Architect and that Mr. Manoj Shah was the DGM - Architect and Liaison. Mr. Manoj Shah had admitted to have been working under Mr. Nikhil Mehta. Mr. Manoj Shah in his statement had stated in his Answer to Q No. 13 that he was responsible for handling the cash matters. According to his Answer to Q No. 11, he would discuss the requirements of the local authorities with his senior, Mr. Nikhil Mehta who in turn would discuss with his senior, Mr. K Bhatija who would sanction the payments, which would range between Rs.3-5 lakhs per approval for each project. In the backdrop of such an averment, the Ld. AR wondered as to how he (Manoj Shah) was not able to spell out the specific details of even one project, for which he had dealt with local authorities and got it completed, which could have supported th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im to assign any specific amount of gratification for each approval. Instead, according to him, the cash payments were not approval wise but paid month on month, which ranged from Rs.8-10 lakhs. Surprisingly, just like Mr. Manoj Shah, even Mr. Nikhil Mehta did not name the specific projects for which payments were being made nor did he name the persons to whom such cash payments were being made. The Ld. AR submitted that, Mr. Nikhil Mehta was an old employee of the company holding the position of Vice-President and therefore it was highly unusual that he was unable to provide any of these details, but he was able to conveniently do the math and state that monthly payment ranged from Rs.8-10 lakhs. According to the Ld. AR, these inconsistencies in the statement fortified his contention that the statements reflected the version of the Department which the employees were pressured to accept and sign. So according to the Ld. AR, the aforementioned statement cannot be taken as a voluntary statement and also cannot be taken as a sole basis to act against the assessee and therefore it has to be discarded. 13. Taking us through the statement of Mr. Amogh Patankar who was the Vice Presid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the purported modus-operandi itself is in question. He thus contended that this statement cannot be the bedrock on which addition could have been made and it is quite unsafe to do so. He pointed out that, according to the statement of Mr. Anand Chandan, his role was always that of an intermediary, who would receive cash from Mr. Rajesh Sidhwani and would hand it over to the other three employees. However, according to Ld. AR even he did not maintain any records nor was he aware of any specific details. Instead, Mr. Anand Chandan vaguely stated that a sum of Rs.35-45 lakhs per month was expended towards liaisoning expenses. According to him, the source of such expenses to the extent of Rs.10 lakhs was out of the cash withdrawals from the accounts of the promoters and that the source of the balance sum was unknown to him, but within the knowledge of Mr. Rajesh Sidhwani and the promoters. Again, even Mr. Anand Chandan did not provide the specific details of such liaisoning expenses such as the name of project, nature of approval, concerned payee, quantum of payment, etc. which he ought to have had known and divulged had such liaisoning expenses been genuinely made by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cash for liaisoning work and gratifications. The relevant excerpts of his statement has been reproduced by the AO at Pages 15 of the assessment order, which is being extracted below as well, for the sake of convenience. Q.8 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051 the statement of Shri Nikhil Mehta, Vice President (Architect) was recorded on oath on 03.12.2017. You are requested to go through Q.No.12 to Q18 of the said Statement and offer your comments. Ans: I have gone through the statement. I am not involved in arranging any cash for providing favours to various officials and I cannot offer any comments. Q.9 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051 the statement of Shri Amogh Patankar [Vice President (Planning Strategy - Industrial Infrastructure Division}, was recorded on oath on 02.12.2017. You are requested to go through Q.No.13 to Q21 and offer your comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch cash handling activities. The question put before him and answer given, is extracted and reproduced as under: - Q-31 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s, K Raheja Group at Raheja Tower, Plot No.C-30, G Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051 the statement of Shri Nikhil Ramesh chandra Mehta, Vice President (Architect) was recorded on oath u/s.132(4) of the Income-tax Act, 1961 on 03-12-2017. Please go through the statement of Shri Nikhil Ramesh chandra Mehta and confirm that you have understood the contents therein. Ans. Sir, I have gone through the statement of Shri Nikhil Rameshchandra Mehta recorded u/s. 132(4) of the Act dated 03-12-2017 and I confirm that I understood the content thereon. Q.32 In the statements recorded on oath Shri Anand Chandan, Associate Vice President During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra ({E), Mumbai - 400 051 the statement of Shri Anand Chandan, Associate Vice President (Finance) was recorded on oath + w/e. 132(4) of the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details of the cash found by the Investigating authorities and the cash appearing in the books of accounts on the date of search. He argued that, had it been a case that the assessee was regularly handling cash for liaison work, excess cash ought to have been found on the date of search. Instead, the cash as per books and the physical cash corroborated which fortified the assessee s case that the original statements of these four employees were bald and thus unreliable. 23. Having regard to the above, even if the statements of the four (4) employees are considered at their face value (ignoring the retraction, as sought by the Ld. CIT-DR), then also in our view, these original testimonies lacked probative value on account of long duration of sustained interrogation running for days and the inconsistency/contradiction brought out and discussed (supra). In the light of the infirmities discussed, we are of the view that some kind of material corroboration was required. Otherwise, such statements alone cannot be sufficient to fasten the assessee with any liability. Eventhough, on first blush, these statements may appear relevant but as noted in the foregoing on account of the inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it is noted that not only were the original statements of the four (4) employees inconsistent, unreliable and suffers from contradiction and the admission made were not backed by any corroborative evidence and these statements had also been retracted and each of the four employees were able to withstand the cross-examination of the AO. Therefore, following the Board Instructions (supra), we find ourselves in agreement with the findings of the Ld. CIT(A), that it was improper for the AO to draw adverse inference on the basis of the retracted testimonies of the four employees. 26. As for as the reliance placed by the Revenue on the decision of the Hon ble Rajasthan High Court in the case of Bannalal Jat Constructions (P.) Ltd.Vs. ACIT(106 taxmann.com 128)is concerned, we have perused the facts involved in the said judgment and find ourselves in agreement with the Ld. CIT(A) that the said judgment was distinguishable on facts and has been not relied by the Ld CIT(A). The relevant Para 6.9 of the Ld. CIT(A) s order is as under:- 6.9 In the current case, the undisputed fact is that there are no documents relating to sourcing of funds required for meeting the demands of local a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of civil construction, he inflated various expenditure and income so generated by inflating the expenditure is in form of cash which was found at his residence and the same was not recorded in his books of accounts and he surrendered the cash so found amounting to Rs.1,21,43,210/-. During the course of post search proceedings and after three months of search action, Shri Bannalal Jat, vide statement recorded under Section 131 on 04.12.2014 again confirmed the admission of undisclosed cash of Rs.1,21,43,210/as has already been offered under Section 132(4) of the IT Act. The CIT (Appeals) and ITAT concurred with the findings recorded by the Assessing Officer and dismissed the appeal filed by the appellant-company. The High Court upheld rejection of subsequently produced cash books / ledgers of the proprietary firm which were not produced at the time of search action doubting their correctness. The High Court observed that: 19.Reverting back to the present case, the ITAT, on the basis of such statement of Shri Bannalal Jat, concluded that he was managing his business affairs of both his proprietary concern as well as appellant-company from his residence and that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mere fact that the assessee retracted the statement at later point of time could not make the statement unacceptable.The burden lay on the assessee to show that the admission made by him in the statement earlier at the time of survey was wrong. Such retraction, however, should be supported by a strong evidence stating that the earlier statement was recorded under duress and coercion, and this has to have certain definite evidence to come to the conclusion that indicating that there was an element of compulsion for assessee to make such statement. In this case, the statement of the owner / promoter was under challenge and it related to explanation regarding source of unaccounted cash of Rs 1,21,43,210/- which had been found and seized during search action. 27. Instead, we find merit in the following decisions relied upon by the Ld. AR: (i) Pr.CIT Vs Nageshwar Enterprises (277 Taxman 86) (Guj HC) 28. In the decided case, on the basis of information received from Department of Revenue Intelligence (DRI), search action u/s 132 of the Act was conducted upon the residential premises of the partners of the assessee firm in which one of the partners admitted to importing goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted in the statement u/s 132(4) of the Act that it was regularly purchasing and selling shares which were not forming part of the regular books and disclosed a sum of Rs.10,50,000/- to have been earned over the years. In the course of assessment, the assessee retracted his statement and contended that it was taken under pressure. The assessee also stated that although during the course of search, books of accounts and loose papers were found and seized, but there was no evidence unearthed which showed that the assessee was involved in the purchase and sale of shares which yielded income of Rs. 10,50,000/-. The AO however did not agree with the objections put forth by the assessee and added the impugned sum as undisclosed income of the assessee. On appeal the appellate authorities noted that there was no evidence to support the very existence of this income except the so called statement u/s 132(4) of the Act. It appreciated the contention of the assessee that, the said admission defied logic for the reason that why would any assessee admit any income in his statement, which admittedly the Department did not unearth from any documents or material found in the course of search. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the facts of the case and particularly surrounding circumstances. Drawing inference from the facts is a question of law. Here in this case, all the authorities below have merely reached to the conclusion of one conclusion merely on the basis of assumption resulting into fastening of the liability upon the assessee. The statement on oath of the assessee is a piece of evidence as per section 132(4) of the Income Tax Act and when there is incriminating admission against himself, then it is required to be examined with due care and caution. In the judgement of Kailashben Manharlal Chokshi (supra), the Division Bench of Gujarat High Court has considered the issue in the facts of that case and found the explanation given by the assessee to be more convincing and that was not considered by the authorities below. Here in this case also, no specific reason has been given for rejection of the assessee's contention by which the assessee has retracted from his admission. None of the authorities gave any reason as to why Assessing Officer did not proceed further to enquire into the undisclosed income as admitted by the assessee in his statement under section 134(2) in fact situation wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the basis of statements of Mr. Surinder Miglani S/o Mr. Om Prakash Miglani, who was a lecturer of MBA with SSRD since August, 2005. This statement was recorded during the course of search. Though Mr. Miglani has retracted from his statement by filing affidavit before the Assessing Officer, this affidavit has not been accepted by the Assessing Officer on the ground that Mr. Surinder Miglani was not an assessee, who facing search action when his statement on oath was recorded. However, the Assessing Officer cannot be said to be justified in rejecting the sworn affidavit of Mr. Miglani on the above ground. Though I agree with the Assessing Officer that none can be allowed to retract from the statement made during the course of search, unless there was evidence to establish that such statement was recorded under duress etc., in the case of appellant, though there is apparently no evidence of such duress etc., this aspect is to be seen keeping in view the totality of the facts and circumstances. As brought out in the assessment order also, the statements of other 11 employees was also recorded during the course of search. Even the names of these persons are mentioned in para 10.2 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead. Keeping in view the above discussion, I am not inclined to agree with the Assessing Officer that the appellant inflated expenses under the head Salary . Though on the basis of statement of Mr. Surinder Miglani recorded during the course of search, adverse inference could be drawn against the appellant, as far as payment of salary to him alone is concerned, keeping in view the entirely of the facts and circumstances i.e., statement of 11 other employees recorded during the course of search and the subsequent affidavit of Mr. Miglani which has been rejected by the Assessing Officer not for some good and valid reasons, it would not be appropriate even to sustain addition even in respect of salary paid to Mr. Miglani. In view of the above, addition of Rs.14,33,132 made by the Assessing Officer is, therefore,deleted. 14. From the above, we find that ld. CIT(A) has decided this issue in proper perspective because the Assessing Officer has based his conclusion on the statement of one employee whereas 11 other employees have stated in the statements that they were getting full salary as debited by the assessee in its books. We also find that the statement of one employee of Shri M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal is dismissed. 34. We also find that the coordinate Bench of this Tribunal at Ahmedabad in the case of Savaliya Buildcon v. Dy. CIT (ITA No. 401/Ahd./2014 and 3188/Ahd./2014) dated 30-4-2019 on somewhat similar facts and circumstances deleted the addition/s made by the AO by extrapolating the statements of two purchasers across the entire block period. The relevant findings of the Tribunal are as under: 8.2 The statement of two purchasers is the bedrock for additions in controversy. It is an admitted position that the statements of two purchasers allegedly claiming to have paid cash money of Rs. 14.10 Lakhs in aggregate, were obtained behind the back of the assessee. The copy of the statement was not provided to the assessee at all. The cross examination of the purchasers were also not provided by the Revenue authorities despite several requests made by the assessee. Such overwhelming facts remain unrebutted on behalf of the Revenue. This being so, the action of the AO in placing reliance upon statement of third party to crucify the assessee is clearly in negation of overriding principles of natural justice which is supposed to be guiding factor in an adjudication pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n clearly falls in the realm of conjunctures and surmises. It is obvious that driven by misplaced suspicion, the AO has presumed the presence of onmoney in respect of each of the residential flat sold. The action of the AO is a mere ipse dixit which is not objectively justifiable by some inculpatory evidence. It is only elementary to say that estimation of unaccounted money cannot be made only on the basis of contemplation. The order of the AO in making additions of Rs. 3.28 Crores is thus clearly arbitrary and unsustainable in law. It is well settled that the Revenue authorities cannot base its findings on suspicions, conjunctures or surmises nor should it act on no evidence at all or on vague considerations partly on evidence and partly on suspicion, conjunctures or surmises. The Revenue could not demonstrate any material except unsupported statements of two persons. Such unverified statements without any proof towards its assertions are not a good evidence and do not raise any estoppel against the assessee. Therefore, the addition made by the AO is in the realm of speculation without any basis whatsoever. Hence, we decline to interferewith the order of the CIT (A) in so far as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Firstly, we deem it fit to deal with the CBDT Circular No.5/2014 relied upon by the Revenue. It is by now well settled in law that any Rule or Circular issued by the CBDT cannot go beyond the literal language used in the main provision. As a corollary, the computation mechanism as set out in Rule 8D of Income Tax Rules 1962 (herein after the Rules), cannot go beyond the provision contained in Section 14A of the Act itself. Going by the language employed in Section 14A of the Act, the position which emerges is that, where the assessee has not earned any exempt income, there cannot be disallowance of expenditure, as it would result in imposing tax on hypothetical income, which is wholly impermissible in law. We find that the Hon ble Delhi High Court in the decision rendered in the case of Pr. CIT Vs IL FS Energy Development Pvt Ltd (399 ITR 483) after considering the Board Circular No.5/2014, has upheld the assessee s contention that, in absence of any exempt income earned in the year in question, the disallowance u/s 14A of the Act is unwarranted. The relevant findings of the High Court is as under: 18. The CBDT Circular upon which extensive reliance is placed by Mr. Hossai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 14A read with Rule 8D. 39. We may also gainfully refer to the following observations of the Hon ble Madras High Court in the case of Marg Ltd. vs CIT (120 taxmann.com 84) wherein also the High Court rejected the proposition set out in the Board Circular No. 5/2014 and held that the disallowance of expenditure u/s 14A can never exceed the amount of exempt income so earned by the assessee. The relevant extracts of the decision are as follows: 5. What seems to have caused this continuous problem is the CBDT Circular No. 5/2014 dated 11-22014, referred to in paragraph 5 of the impugned order of the Tribunal dated 6-4-2016 before us in the present case. In that Circular, the CBDT has clarified that Rule 8D read with Section 14A of the Act provides for disallowance of expenditure even where the taxpayer in a particular year has not earned any exempt income. This argument of Revenue, which prevailed with the Tribunal, is not at all tenable. 12. Another Bench of Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221 248 Taxman 55 wherein the Division Bench of the Court followed another Division Bench judgement in the case of Red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation method under Rule 8D of the Income-tax Rules, 1962. 40. It is also noted that the Hon ble Supreme Court in its judgement dated 08.02.2019 in the case of CIT vs Oil Industry Development Board (SLP (Civil) No. 2755/2019) has dismissed the SLP filed by the Revenue against the judgement of the Hon ble Delhi High Court dated 16.02.2018 by relying upon its decision in the case of CIT vs Essar Teleholdings Limited (2018) 3 SCC 253. The Hon ble Delhi High Court had ruled that, in absence of any exempt income, disallowance u/s 14A of the Act of any amount was not permissible. In arriving at this conclusion, the Hon ble Delhi High Court had relied upon its earlier decision in the case of Cheminvest Ltd. vs CIT (378 ITR 33). The relevant extracts of the judgement are as under: 1. The Revenue's appeal challenges an order of the Income Tax Appellate Tribunal (ITAT) which had set aside the disallowance of Rs. 1,62,49,000/- under Section 14A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'). 2. The Assessing Officer (AO) and later the CIT (A) made the disallowance by taking into account only the investment patterns of the assessee for the concerned as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Ltd Vs CIT(402 ITR 640) which is set out hereunder: 40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT though we are not subscribing to the theory of dominant intention applied by the High Court. (ii) The Hon ble Delhi High Court in the case of PCIT vs DLF Home Developers Ltd. (114 taxmann.com 97) also restricted the disallowance u/s 14A to the extent of exempt income earned during the year. The relevant extracts of the said decision are as follows: 2. As far as first issue - disallowance under Section 14A is concerned, the Court notices that the exempted income in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 11.3 Pertinently, the Division Bench in Redington (India)Ltd. (supra) case has repelled this precise argument. 12. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income. 12.1 The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked. 12.2 While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board. 15. However, it is, our view, as indicated above, independent of the reasoning given in Redington (India) Ltd. case (supra) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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, 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) 124ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislature is fully aware of three concepts: i) prospective amendment with effect from a fixed date; ii) retrospective amendment with effect from a fixed anterior date; and iii) clarificatory amendments which are retrospective in nature. 48. The above judgement of the Hon ble Supreme Court was also taken note of by the Hon ble Supreme Court in the case of M/s Snowtex Investment Ltd. vs. PCIT dated 30.04.2019 [Civil Appeal No(s). 4483 of 2019, Special Leave to appeal (c) No. 20017/2017] wherein the Hon ble Supreme Court has explained the test to be applied to find out whether the intent of the Legislature/Parliament is to give retrospective operation of law and accordingly held as under: The Test to be applied is essentially one of the intent of the legislature. 28. In a more recent decision in Commissioner of Income Tax vs. Vatika Township Pvt. Ltd. (2015) 1 SCC 1, a Constitution Bench of this Court held thus: 29. In M/s. Vijay Industries (supra), decided on 1 March 2019, a three judge Bench of this Court held that the provisions of Section 80AB which were introduced by the Finance (No. 2) Act, 1980 with effect from 1 April 1981 could not be regarded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from a fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature. 50. On the above touchstones, we note that the Memorandum explaining the Notes on Clauses of Finance Act, 2022 read as under: 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 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 dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act. It is proposed to amend sub-section (1) of the said section to provide that notwithstanding anything to the contrary contained in this Act, for the purpose of computing the total income, no deduction shall be allowable in respect of expenditure incurred in relation to income which does not form part of the total income. This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years. It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total 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 income not form part of the total income. This amendment will take effect from 1st April, 2022. 52. From the above, the legislative intent is clear, the amendment brought in by the Finance Act, 202 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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