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TMI Blog2024 (6) TMI 983X X X X Extracts X X X X X X X X Extracts X X X X ..... - Hon ble Supreme Court in the case of Reliance Industries Ltd. [ 2019 (1) TMI 757 - SUPREME COURT ] was pleased to hold that the Hon ble High Court had noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to makes its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. Hon ble Supreme Court in GVK Project and Technical Services Ltd. [ 2019 (5) TMI 725 - SUPREME COURT ] was pleased to hold that in the absence of any exempt income, disallowances were impermissible because for the relevant A.Y. 2013-14, concededly, the assessee did not report any exempt income. AO has proceeded for disallowance made in this case on the basis of presumptions that the investment was made from the borrowed funds bearing interest expenditure which may earn dividend income in future and further that such disallowances and additions are permissible u/s. 14A r.w.r. 8D of the I. T. Rules, 1962. In view of the discussions made and the relevant law laid down by the Hon ble Supreme Court as well as Hon ble High Court, the said finding and observation of the Ld. AO are neither tenable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome or any other exempt income and in the absence of exemption of an income from the charge of tax the provisions of Section 14A could not be applied; b) Not appreciating that learned Assessing Officer had made disallowance of huge interest expenditure without arriving at a finding that the petitioner had employed borrowed funds for the acquisition of the shares in question; c) Not appreciating that the disallowance under Rule 8D was not automatic and it was incumbent upon learned Assessing Officer to record proper satisfaction on actual facts of the case that disallowance under Rule 8D was called and d) Erroneously applying the provisions of Explanation inserted by Finance Act 2022 to Section 14A whereas the Assessment Year under consideration is 2016-17. 3. That the appellant craves leave to reserve to himself the right to add to, alter or amend any of the aforesaid grounds of appeal before or at the time of hearing and to produce such further evidence, documents and papers as may be necessary. 4. That the impugned order being contrary to law, evidence and facts of the case may kindly be set aside, amended or modified in the light of the grounds of appeal enumerated above. 5. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 The assessee company Vide Notice u/s 142(1) issued on 19.08.2018 was asked to explain why provision of Sec 14A r.w.r. 8D are not applicable to you and why disallowance may not be made u/s 14A r.w.r. 8D of the LT.Rules. Further a show-cause notice were also issued on 07/12/2018, requesting the assessee to show cause as to why disallowance u/s 14A r.w.r 8D as worked out at amounting to Rs. 50,81,159/- shall not be made in your case. In response to the same the A R of the assessee filed its reply as follows: We have not received any exempt income, hence provisions of Section 14A r.w.r. 8D of the IT Rules are not applicable to us. Without prejudice to the above, we further submit that we have purchased shares of Zodiac Developers Private Limited to acquired controlling interest in the subsidiary company viz. Zodiac Developers Pvt Ltd. Shares purchased by person as promoter, manager, or controller of companies is acquisition of shares for the purpose of business and profession of promoting, managing or controlling companies. Therefore. interest payable on capital borrowed for purchasing shares by such persons will be allowable and section 14A cannot be applied through dividend receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial statements of the assessee. The following facts were drawn from the Financial Statement of the assessee: (i) on perusal of the balance sheet of the assessee it was observe that the assessee had Non-Current Investment of Rs. 15,60,00,000/- as on 31/03/2016 and 31/03/2015 in the Equity Shares, out of the total of the assets side of Rs. 15,94,58,744/- as on 31.3.2016 and Rs. 15,72,01,787/- as on 31.03.2015. The income from the above investment may result into Dividend income which is exempt income (ii) The assessee had Short-term borrowing of Rs. 3,06,01,355 as on 31.03.2016 and Rs. 3,31,20,033 as on 31.03.2015. (iii) The assessee had Finance Cost of Rs. 43,65,629/- debited to the profit loss account and other expense of Rs. 27,82,092/-. (iv) Revenue of the Assessee for the F.Y. 2015-16 consist of Sale of Services (Architect and Liaisoning fee) and Interest Income. (v) In view of the above fact, it is clearly shown that the interest bearing fund were used to made investment in equity shares. 5.3 Further It has been held in the case of Godrej Royce vs. DCTT (Bombay High Court) that Rule 8D r.w.s. 14A (2) is not arbitrary or unreasonable. Also, the CBDT vide its circular dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Bal. of investments = 15,60,00,000 + 15,60,00,000 = Rs. 15,60,00,000/- 2 C. Average value of Total assets = Opening balance of Total Assets + Closing Balance of Total Assets 2 5.6. In view of the above facts, Rs. 50,81,159/- is disallowed u/s. 14A and added to the total income of the assessee. This is the fit case for initiated of penalty u/s. 271(1)(c) of the Income Tax Act, 1961, as the assessee has furnished inaccurate particulars of its income. Therefore, penalty notice u/s. 271 (1)(c) of the I.T. Act, 1961 is issued for furnishing inaccurate particulars of income. 5. The Ld. CIT(A) had confirmed the order of the Ld. AO for the reasons mentioned in para 5.7 of Ld. CIT(A)order and is reproduced as under: 5.7 It would not be outer place to mention here that the Finance Act 2022 had amended section 14A. Most importantly the amendment has been made operational retrospectively to hold that even if no exempt income is earned yet provisions of section 14A would apply. An explanation to section 14A of the Act has been inserted by Finance Act 2022 to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfaction of the Ld. AO u/s. 14A or whether the explanation to section 14A inserted by Finance Act, 2022 can be made applicable retrospectively? 7. We have heard the Ld. AR on behalf of the assessee and Ld. DR on behalf of the revenue and also considered the facts and circumstances and the case referred and relied on behalf of appellant/assessee. The Ld. AR on behalf of the appellant/assessee has argued that: i. When no exempt income was earned in the financial year 2016, the addition u/s. 14A was not permissible. ii. The explanation inserted by Finance Act, 2022 in Section 14A cannot be applied retrospectively. iii. The Ld. AO has not specified any income therefore anticipated income cannot be called as taxable income. iv. The observation of the Ld. CIT(A) at page 13, para 5.7 of his ordershows that the Ld. CIT(A) has held that the amendment to Section 14A is applicable retrospectively for doing disallowance u/s. 14A r.w.r. 8D of the IT Rules, 1962, notwithstanding that no exempt income has been earned for the relevant A.Y. 2016-17. 8. In support of his arguments, the Ld. AR on behalf of the assessee referred and relied upon the following cases: Case No. 1: Civil Appeal No. 7020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K Project and Technical Services Ltd., [2019] 106 taxmann.com 181 (SC), dated 03.05.2019: 1. The Revenue s appeal is with respect to the disallowance made by the Assessing Officer ( AO ) under Section 14A of the Income-tax Act, 1961 (hereinafter the Act ). The AO had proceeded to calculate the disallowances based upon the investments made by the assessee. The CIT(A) and the Income Tax Appellate Tribunal (ITAT) allowed the assessee's appeals by following the ruling in Cheminvest Ltd. vs. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi): the Court had then held that in the absence of any exempt income disallowance was impermissible. For the relevant Assessment Year (2013-14), concededly, the assessee did not report any exempt income. Consequently, no substantial question of law arises; the appeal is therefore dismissed alongwith the pending application. Case No. 4: Civil Appeal No.351-355 of 2005, Sedco Forex International Drill. Inc. Ors. Vs. Commissioner of Income Tax, Dehradun Anr., Hon ble Supreme Court order dated 17.11.2005: In our view the 1999 Explanation could not apply to assessment years for the simple reasons that it had not come into effect then. Prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective, irrespective of the fact that the phrases used are it is declared or for the removal of doubts . 18. There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word earned had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income arising or accruing in India . The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, income payable for service rendered in India . 19. When the Explanation seeks to give an artificial meaning to earned in 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h exempt income. The Ld. CIT(A) has concluded in para no. 5.7 that the amendment has been made operational retrospectively to hold that even if no exempt income is earned, yet provision of Section 14A is appliable. 13. The Ld. AR on behalf of the assessee/appellant has vehemently argued that as noticed earlier that the said amendment in Section 14A is not applicable retrospectively and further that the assessee has sufficient funds apart from the borrowed amount carrying interest for investment in shares and as such the disallowances u/s. 14A was not warranted because no exempt income was earned in the previous year relevant for the concerned A.Y. 2016-17. 14. The Hon ble Supreme Court in the case of Commissioner of Income Tax Vs. Reliance Industries Ltd., (case no. 2 referred supra ) was pleased to hold that the Hon ble High Court had noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to makes its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. 15. Further, the Hon ble Supreme Court in Principal Commissioner of Income Tax Vs. GVK Project and Techni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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