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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 ..... 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, 21.03.2016, 23.12.2016 and 23.06.2017 respectively. Accordingly, the assessments for AY 2012-13 to 2015-16 being not-pending before the AO on the date of the search, did not abate consequent to the search as per second proviso to section 153A of the Act. And also, since the return of income for AY 2016-17 was filed on 17.10.2016, and undisputedly the time limit for issuance of notice u/s 143(2) of the Act for this year had expired as on the date of search on 30-11-2017. Accordingly, the AY 2016-17 was also unabated, and was not pending before the AO on the date of the search. With regard to AY 2017-18, it was pointed out that the time limit for issuance of notice u/s 143(2) of the Act had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rriding 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) deleting the addition of Rs.4,80,00,000/- made by the AO u/s 69C of the Act. Brief facts are that, the assessee is a Private Limited Company which is engaged in the business of providing project and business support services and leasing of premises. In the year under consideration, the company had earned income by way of license fees, rent, compensation, maintenance cost recovery, business support fees, management consultant fees, royalty, interest, sale of scrap, etc. The AO noted that, in the course of search conducted u/s 132 of the Act at the premises of M/s K Raheja group (hereinafter Raheja group) on 30-11-2017, the Investigation authorities had recorded the statements of four (4) senior l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 lakhs per month towards liaisoning work which were not accounted for in the books; and accordingly he extrapolated the same across all seven AYs 2012-13 to 2018-19 and added Rs.4,80,00,000/- as unexplained expenditure u/s 69C of the Act in each of these years. Aggrieved by the order of the AO, the assessee preferred appeals before the Ld. CIT(A) who deleted the addition made by the AO. The Revenue is now in appeal before us. 5. Assailing the action of the Ld. CIT(A), the Ld. CIT-DR appearing on behalf of the Revenue supported the action of the AO. He contended that the four(4) different employees of the assessee had originally admitted to making cash payments for liaison work on behalf of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 behalf of the assessee mainly relied on the finding recorded by the Ld. CIT(A) which will be discussed (infra) in detail. 6. We have heard both the parties and perused the material on record. As stated above, we take AY 2018-19 to be the lead AY. The main thrust of the Revenue's argument is that the addition made by the AO u/s 69C of the Act was justified as it was made on the basis of the statements given by four employees in the course of search u/s 132(4) of the Act which is an important piece of evidence in itself and that their subsequent retraction was of no relevance. In order to adjudicate this contention, it is first relevant to examine the extant provisions of Section 132(4) of the Act wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that such statement may be recorded before independent/respectful witnesses. In this context, the Hon'ble Apex Court in the case of Pullengole Rubber Produce Co. Ltd. v. State of Kerala (91 ITR 18) has held that although an admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It was held that, it is open to the assessee who made the admission to show that it is incorrect. The same view has been expressed by the Hon'ble Supreme Court in the case of Sarwan Singh Rattan Singh v. State of Punjab AIR 1957 SC 637 where it was observed that admission is not conclusive as to the truth of the matters stated therein. It is only a piece of evidence, and the weight to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances, 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 obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely. Further, in respect of pending assessment proceedings also, Assessing Officers should rely upon the evidences/materials gathered during the course of search/survey operations of thereafter while framing the relevant assessment orders." 9. This view was again reiterated by the CBDT in their Circular No. F.NO.286/98/2013-IT (INV.II)], dtd 18-12-2014 which read as follows: "Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter 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 was immediately interrogated for several hours on the same date and his statement was recorded. Having regard to these facts and surrounding circumstances, the Ld. AR contended that these statement which were recorded during the search proceedings continued for long periods. He submitted that it is common knowledge that in a search, employees or individuals are continuously interrogated and questioned for several hours at a stretch (which in the present case was days) and therefore many a times the said individuals would give involuntary statement solely with the intent to put an end to the agony of interrogation. So, according to him, when it is found as fact that a statement has been recorded after days of interroga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, 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 the Assessing Officer was that the statement was not retracted immediately and it was done after two months. It was an afterthought and made under legal advise. However, if such retraction is to be viewed in light of the evidence furnished along with the affidavit, it would immediately be clear that the assessee has given proper explanation for all the items under which disclosure was sought to be obtained from the assessee...............There was, therefore, no reason for making addition of Rs. 4 lakhs on the basis of alleged disclosure made by the assessee in his statement recorded under section 132(4) of the Act. In support of this statement the Revenue has not brought any evidence whatsoever which would establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirements 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 the so-called modus-operandi which he explained to the Investigating Officer. According to the Ld. AR, if the statement of Shri Manoj Shah is taken at its face value, then according to Mr. Shah, he was responsible for negotiating with local authorities, estimating the expected gratuitous payments to be made, conveying it to seniors, obtaining sanction for the same and thereafter handling the cash. The Ld. AR however brought to our notice that apart from stating general modus operandi, the statement of Mr. Shah did not even contain a whisper of any specific details viz., the specific approvals for which such sums were being purportedly paid, or the names of the specific projects, or the projected/sanction amount qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 President of Planning & Strategy, the Ld. AR pointed out similar fallacies and inconsistencies, as was noted in the statements of Mr. Nikhil Mehta and Mr. Manoj Shah. In response to Q No. 16, Mr. Amogh Patankar stated that he would inform the requests of the officials to Mr. Rajesh Sidhwani, Senior Manager, Banking, who would then sanction his request and inform him whether to honour the requests made by the officials or not. According to Ld. AR, this averment is appalling for the reason that Mr. Amogh Patankar, VP was senior to Mr. Rajesh Sidhwani, Senior Manager and therefore it was unusual for a VP to seek permission/sanction of a manager. The Ld. AR then took us through the answers given by him to Q. Nos. 17 to 21, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 15. In view of the above discussion, according to the Ld. AR, these statements relied upon by the AO to justify the addition impugned in these grounds were not only general and vague but factually inconsistent as well. He therefore submitted that the Ld. CIT(A) had rightly discarded these statements, in as much as even if they were considered at their face value, these statements in itself did not contain any evidence or material which could be used against the assessee to justify the addition made u/s 69C of the Act. 16. It is further noted that, the testimonies of the four employees which are the substratum of the addition has been retracted within seven (7) days, which is evident from the affidavits sworn before a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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.10 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 on 02.12.2617. You are requested to go: through Q.No.16 to Q31 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. 11 During the course of sea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1961 on 02-12-2017 / 03-12-2017 & 04-12-2017. Please go through the statement of Shri. Anand Chandan and confirm that you have understood the contents therein. Ans, Sir, 1 have gone through the statement of Shri Anand Chandan recorded u/s.132(4) of the Act dated 02-12-2017 / 03-12-2017 and 04-12-2017 and confirm that I understood the content thereon." 20. It is noted that the Revenue was unable to bring on record any post-search enquiries conducted by the Investigating authorities wherein they would have reexamined or confronted these four (4) employees, whose statements had already been refuted by Mr. Rajesh Sidhwani and Mr. Neel Raheja, the alleged key persons involved in providing funds for the alleged modus operandi of arranging & pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stained 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 infirmities and failure of the Revenue to corroborate the same with some independent evidence about the purported general modus operandi as carried out by them on behalf of assessee [that monies were actually paid for getting approval of projects] it is not prudent to rely on the same to drew adverse inference against the assessee. We note that the Ld.AR appearing on behalf of the assessee has brought out the apparent fallacies in these four (4) statements as discussed (supra) and the key persons who were alleged to be the main perpetrators involved in providing the monies for gratuitous payments have denied the statements of these four employees under oath in the course of search and in post search enquiries. On these facts, we thus hold that these ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28)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 authorities not there is any evidence of actual payment made to them. There is also no evidence of any internal memo / correspondence / conversation / noting in this regard. The statements given by various persons do not match with respect to either the process or the estimate of actual expenditure. In the assessment order, the AO has relied on various judicial pronouncements in support of his decision to reject the statement of promoter Neel Raheja, Rajesh Sadhwani and retracted statements of the four employees in favour of the original statements of these four persons. The assessee has objected to the reliance claiming that the facts in these cases were not identical. It is necessary to examine these cases to decided whether these cases indeed provide bind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 absence of individual cash-book of respective concerns and other details maintained by him, it is not possible to identify whether the cash so found belongs to the proprietary concern or to the assessee company. Subsequently, when the statement under Section 132(4) of the IT Act was recordeddt. 10. 10.2014, which was concluded at his residence, Shiv Bannalal Jat categorically admitted that the cash amount of Rs.1,24,43,210/- belonged his company M/s. Bannalal Jat Construction Private Limited and the same was its undisclosed income. Thereafter another statement under Section 132(4) of the IT Act was recorded at his business premises on 11.10.2014. In reply to question No. 8 he was asked to explain the source of cash amounting to Rs.3,380/- found at his office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 goods from China/Japan at undervalued figures and stated that the differential was paid in cash to the sellers. The said statement was later on retracted by the partner stating that it was obtained under duress. 29. The AO, however, by placing reliance on this statement made addition in the hands of the assessee firm. On appeal both the Ld. CIT(A) and this Tribunal deleted the addition as it was made merely on the basis of the statement which had been retracted and there was no corroborative material or evidence brought on record by the AO to justify the addition. Before the Hon'ble Gujarat High Court, the Revenue relied upon the decision in the case of Bannalal Jat Constructions (P.) Ltd. v. Asstt. CIT (supra). The Hon'ble High Court noted that the facts involved this jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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. The appellate authorities accordingly deleted the addition. On appeal, the Hon'ble High Court answered the question in favour of the assessee by holding as follows: "6. We have heard learned Counsel for the respective parties and perused the records of the case. We are of the view that the CIT (Appeals) has rightly appreciated the case based on the sound principles of law and has also considered the statement made by the assessee at the relevant point of time. We are of the view that in light of the observations made by this Court in the case of Kailashben Manharlal Chokshi (supra), mere speculation cannot be a ground for addition of income. There must be a some material substance either in the form of documents or the like to arrive at a ground for addition of income. Considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 where during the course of search, there was no recovery of assets or cash by the Department. This fact also has not been taken care of and considered by any of the authorities that in a case where there was search operation, no assets or cash was recovered from the assessee, in that situation what had prompted the assessee to make declaration of undisclosed income of Rs. 20 lakhs. Mere reading of statement of assessee is not the assessment of evidentiary value of the evidence when such statement is self-incriminating. Therefore, we are of the considered opinion that in the present case, a wrong inference had been drawn by the authorities below in holding that there was undisclosed income to the tune of Rs. 20 lakhs." (iv) CIT Vs S.S.R.D Somany Sikshan Sansthan (201 Taxman 313) (P&H HC) 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 of the assessment order. The Assessing Officer admits in the assessment order itself that all these statements were in favour of the appellant. However, he has rejected such evidence on the ground that the employees would speak in conformity with interest of their employees. However, again the Assessing Officer cannot be held to be justified in rejecting the evidence as above on this ground. Whereas he has based his entire assessment order on the basis of statement of one such employee, he has ignored the statement of other 11 similar employees. If the statements of all these 11 persons are considered, the adverse inference drawn by the Assessing Officer against the appellant is not sustainable. In addition to the above evidence, the Assessing Officer has himself mentioned that he was making addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 Miglani was also retracted by him by filing an affidavit. Under these facts we find no good reason to interfere in the order of the ld. CIT(A) on this issue and hence we uphold the same. This ground of the revenue is dismissed." 8. No perversity or illegality could be pointed out by the learned counsel for the appellant in the aforesaid findings recorded by the Tribunal. The only endeavour of the learned counsel was to reappreciate the evidence so as to pursuade this Court to take a different view, which is not permissible." 33. As far as the dispute regarding extrapolation is concerned viz., the AO's action of adding the sum of Rs.4,80,00,000/- estimated in AY 2018-19, in the earlier AYs 2012-13 to 2017-18 as well; we find merit in the Ld. AR's contention that, the AO had applied the theory of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 process. Needless to say, the appropriate opportunity to an affected party is not a gift but an absolute and salutary right which cannot be simply bypassed. The infringement of basic principles of natural justice has thus vitiated the order of the AO to the core. The legitimate expectation of the assessee to seek cross examination of a person making adverse comments against the assessee to enable it to traverse the assertions cannot be shunned in sub-version of judicial propriety while weighing an issue. The right to fair hearing is a guaranteed right. Every person affected by the statement of third party has indispensible right to know the evidence used against him. The AO as well as the CIT (A) has violated this cardinal principle as squarely underscored in Kishanchand Chellaram v. CIT 125 ITR 713 (SC) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate 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 appeal of the Revenue is concerned." 35. For the various reasons set out above, we therefore do not see any reason to interfere with order of the Ld. CIT(A) and accordingly dismiss the Ground Nos. 1 to 3 raised by the Revenue in AY 2018-19. The same findings shall mutatis mutandis apply to Ground Nos. 1 to 3 of the appeals for AYs 2012-13 to 2017-18 as well. Hence, the Ground Nos. 1 to 3 raised by the revenue in AYs 2012-13 to 2018-19 stands dismissed. 36. Ground No. 4 of the appeal is against the Ld. CIT(A)'s action of deleting the disallowance made u/s 14A of the Act read with Rule 8D. Briefly stated, the assessee holds investments in shares of various group/associate companies, none of which yielded any exempt income in the AYs 2012-13 to 2018-19. It was the case of the assessee that, in absence of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered. 19. In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC), the mandate of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular 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 Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.) and held that the view of the Central Board of Direct Taxes in Circular No. 5 of 2014 dated 112-2014, which has been relied by the Tribunal in the impugned order cannot be upheld and the disallowance under section 14A of the Act cannot go beyond the extent of exempted income itself. Paragraph 12.3 of the said judgement is quoted below for ready reference. ....... 13. .... Unfortunately, the Revenue Authority and the Tribunal have read Rule 8D without context and as an independent provision of disallowance, as if it was an island provision of law and the disallowance computed as per Rule 8D of the Rules can go beyond the exempted income itself and can be added as a taxable income in the hands of the Assessee. Such an interpretation put by Revenue Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 assessment. 3. The ITAT relied upon the ruling of this Court in Cheminvest Ltd. v. CIT [2015] 378 ITR 33 which ruled in the absence of any exempt income, disallowance under Section 14-A of the Act of any amount was not permissible. Since the decision in Cheminvest Ltd. (supra) was followed, there is no substantial question of law that requires consideration. 4. The appeal is therefore dismissed." 41. The jurisdictional Bombay High Court in the case of Pr.CIT Vs Kohinoor Project Pvt Ltd (121 taxmann.com 177) following the above judgement of Hon'ble Delhi High Court has also held that in absence of exempt income, no disallowance is warranted u/s 14A of the Act. The relevant findings of the Hon'ble High Court are as follows: "6. Aggrieved by the reduction in the quantum of disallowance revenue preferred appeal before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh 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 this case is Rs. 3.17 lakhs. The Assessing Officer had disallowed Rs. 59 crores which was reduced to Rs. 8 crores by the CIT(A). Following the decision of this court in Joint Investments (P.) Ltd. v. CIT [2015] 59 taxmann.com 295/233 Taxman 117/372 ITR 694, the ITAT restricted the disallowance to the income earned i.e. Rs. 3.17 lakhs. So, there is no infirmity in this approach. No question of law arises." 43. The SLP filed by the Revenue against the above judgement has since been dismissed by the Hon'ble Supreme Court vide its order dated 26.08.2019 (114 taxmann.com 98) and therefore the decision of Delhi High Court has attained finality. (iii) The Hon'ble Madras High Court in the case of Chettinad Logistics Pvt Ltd. vs CIT (257 Taxman 2) observed as under: "8. According to us, this exercise, in the given facts which emerge from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. 15.1 Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue." The SLP filed by the Revenue against the above judgment has since been dismissed by the Hon'ble Supreme Court which is reported in 95 taxmann.com 250. 44. In view of the above catena of judgements, it is abundantly clear that in absence of any exempt income, no disallowance u/s 14A of the Act is permissible. 45. Having held so, the next question for our consideration is whether the following Explanation inserted by the Finance Act, 2022 in Section 14A of the Act is required to be retrospectively applied and fastened on the assessee or not. "Explanation.-For the removal of doubts, it is hereby clarified that not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". 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 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. 23. This being the case, Explanation 3C is clarificatory - it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court. 24. Third, any ambiguity in the language of Explanation 3C shall be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clarificatory in nature. The Court held that the provision was made with prospective effect and the amendment would not apply to assessment year 1979-1980 and 1980-1981 because the amended provision was brought on the statute book after the assessment years in question. 30. In conclusion, we therefore, hold that the amendment which was brought by Parliament to the Explanation to Section 73 by the Finance (No 2) Act 2014 was with effect from 1 April 2015. In its legislative wisdom, the Parliament amended Section 43(5) with effect from 1 April 2006 in relation to the business of trading in derivatives, Parliament brought about a specific amendment in the Explanation to Section 73, insofar as trading in shares is concerned, with effect from 1 April 2015. The latter amendment was intended to take effect from the date stipulated by Parliament and we see no reason to hold e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular 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 during a previous year, an assessee incurs an expense of Rs.1 lakh to earn non-exempt income of Rs.1.5 lakh and also incurs an expense of 20,000/-to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued/received during the year, it amounts to holding that Rs.20,000/-would be allowed as deduction against non-exempt income of Rs.1.5 Lakh even though this expense was not incurred wholly and exclusively for the purpose of earning non-exempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act. 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 notwi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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