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TMI Blog2024 (11) TMI 816X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee were much more than the investments made by the Assessee, hence no disallowance be made u/s. 14A of the Act on account of interest expenditure - Hon'ble Supreme Court in the case of CIT -Vs- UTI Bank Ltd [ 2022 (10) TMI 613 - SC ORDER] held that where interest free own funds available with assessee exceeded their investments in tax free securities, investments would be presumed to be made out of assessee s own funds and proportionate disallowance was not warranted u/s. 14A. Thus we hold that the disallowance made by the Ld AO u/s. 14A is legally not tenable and liable to be deleted. Mandatory for the AO to record dis-satisfaction as required u/s. 14(2) - Disallowance made invoking Rule 8 without recording dis-satisfaction by the Assessing Officer is against the provisions of section 14[2] and the addition is liable to be deleted. MAT computation on section 14A addition - Provisions of section 14A cannot be applied for computing the book profit u/s. 115JB of the Act and thereby delete the addition made by the AO. Depreciation on goodwill arising from amalgamation u/s. 32 - HELD THAT:- The basic fallacy in the approach of the Ld AO in this case is that he has proceeded furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as CIT(A) ), arising out of the separate assessment orders passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) relating to the Assessment Years 2016-17 and 2017-18. Since common issues are involved in both the years namely disallowance u/s. 14A rwr 8D and Depreciation on Goodwill, the same are disposed of by this common order for the sake of convenience. Asst. year 2016-17 is taken as the lead case. 2. Brief facts of the case the assessee is a company engaged in the business of manufacturing Wind Turbine Generators [WTG], Rotor blades, parts of WTG, etc. For the Asst. year 2016-17 assessee filed its Return of Income on 28-11-2016 declaring total loss of Rs. 1128 crores, which was revised on 31-10-2017 declaring current year loss as Rs. 1128 crores to give effect to the Scheme of Amalgamation of its three subsidiary companies. 2.1. First issue is disallowance u/s. 14A RWR 8D: The assessee company has made investment in shares of various companies. Since, substantial investments are made in shares, mutual funds etc, the income from which does not form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance u/s. 14A of the Act while computing income under section 115JB of the Act. Assessee submitted the title itself suggest the section provides for disallowance of expenses to be made while computing TOTAL INCOME. It is pertinent to note that u/s. 115JB, total income is not computed but BOOK PROFIT is computed and comparison is made between tax on total income and tax on book profit. There is no deeming of total income u/s 115JB, hence disallowance u/s. 14A cannot be applied while computing book profit. Further in opening line of first sub-section it has been clearly mentioned that the subject disallowance is to be made for the purpose of computing income under THIS CHAPTER only i.e. Chapter IV which relates to computation of Total Income as per ITR, whereas section 115JB is forming part of Chapter XII-B to which provisions of section 14A cannot be applied. Thus it may be appreciated that the title itself suggest the section provides for disallowance of expenses to be made while computing TOTAL INCOME. It is pertinent to note that u/s. 115JB total income is not computed but BOOK PROFIT is computed and comparison is made between tax on total income and tax on book profit. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mely SWIL manufacturing Nacelle; SEBL manufacturing Rotor Blades and SEEL manufacturing Generator, Electrical Panels Transformers. 4.1. To reap several commercial benefits in terms of economies of scale, assessee entered into a Scheme of Arrangement in the nature of Amalgamation with the above named SWIL, SEBL and SEEL wholly owned subsidiaries. Thus the Assessee company originally filed an application for approval of the Scheme of Arrangement before the Hon'ble High Court of Gujarat, which was subsequently transferred to the National Company Law Tribunal vide order dated 06.03.2017 in view of Rule-3 of The Companies (Transfer of pending proceedings) Rules, 2016. It is thereafter the Scheme of Amalgamation was duly approved by NCLT vide order dated 31.05.2017. The appointed date as per the Scheme of Amalgamation was 01.01.2016 . Relevant and operative clauses of the Scheme of Amalgamation as approved by NCLT reads as follows: Clause 12.2: The value of investments in equity shares as well as preference shares of the Transferor companies held by the Transferee company shall stand cancelled in the books of the Transferee company, without further act or deed. The cost of acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the goodwill arising out of amalgamation as intangible asset for Rs. 503.72 Crore, Rs 535.51 Crore and Rs 20.57 Crore in case of SWIL, SEBL and SEEL respectively. Thus, totalling to Rs 1059.80. It is further seen that the assessee has claimed depreciation of Rs. 132.48 Crores on the goodwill so created. Since, the intangible assets in the form of goodwill was owned/held by the amalgamating companies prior to the amalgamation at NIL cost only, after amalgamation, it has to be taken as NIL cost in the hands of the amalgamated company. Besides the case laws relied upon by the assessee are distinguished on facts supra. The intricacies of fifth proviso to section 32(1), section 49(1)(iii)(e). Explanation 7 to section 43(1) and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii) have already been discussed and established that Depreciation cannot be claimed on goodwill arising out of amalgamation under the existing provisions of the Income-tax Act. 1961 in the present set of circumstances which exists in this case. 5.8. Further, it has been held by no less than Hon'ble Apex Court in the case of Baroda Distributors P Ltd. 155 ITR 120 that: To perpetuate an error is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT(A) has erred in law and facts of the case in confirming the action of AO in holding that the goodwill has to be taken at NIL cost in the hands of the appellant. 7. Both the lower authorities have erred in law and on facts in not properly appreciating and considering various submissions, evidences and supporting documents placed on record during the course of the assessment proceedings and not properly appreciating various facts and law in its proper perspective. 8. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in levying interest u/s. 234A/B/C of the Act. 9. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in initiating penalty u/s. 271(1)(c) of the Act. 10. The Ld. CIT(A) has erred in not considering various facts and in not appreciating the facts and law in their proper perspective. 11. The Appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. 8. The solitary Ground of Appeal filed by the Revenue in ITA No. 302/Ahd/2023 for A.Y. 2016-17 reads as under: Whether the Ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Ahd Tri], thus the present department appeals are liable to be dismissed. 9.2. Ld CIT DR Shri Prithviraj Meena appearing for the Revenue could not dispute above facts and also could not place on record any contrary decision passed by any Higher Forum, however he pleaded to sustain the addition made by the Assessing Officer and allow the department appeals. 9.3. This issue is no more res-integra since the same is settled by the Special Bench decision in the case of ACIT vs. Vireet Invest ments Pvt. Ltd 82 Taxmann.com 415 (Delhi Tribunal) (SB) wherein it was held as follows: The question is, whether the amount or amounts of expenditure relatable to exempt income as contemplated in clause (f) to Explanation 1 to section 115JB(2) could be arrived at by resorting to provisions of section 14A or not. The department, contention, is that the object of section 14A and clause (1) to Explanation 1 to section 115JB(2) is same and, therefore, it cannot be disputed that section 14A can be resorted to for finding out the expenditure relatable to any income which is exempt. [Para 6.2] When the question arises as to the applicability of similar provisions in different parts of the statute, then it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text with the adjustment made on account of the disallowance under section14A in computing the book profit. In this context, the findings recorded by the ITAT are as follows: 17. Next common issue involved in both years is, whether the amount disallowed under section 14A read with rule 8D deserves to be added back in the book profit for the purpose of section 115JB. In other words, whether the additions which have been confirmed by the Tribunal at Rs. 1.55 crores in the assessment year 2012-13 and Rs. 75 lakhs in the assessment year 201314, deserves to be added back in the book profit computed for the purpose of section 115JB. 17.1 The ld. counsel for the assessee at the very outset contended that this issue is covered in favour of the assessee by the judgment of Hon'ble Gujarat High Court in the case of CIT Vs. Alembic Ltd. in Tax Appeal No.1249 of 2014 as well as decision of Hon'ble Bombay High Court in the case of CIT Vs. Bengal Finance Investment P. Ltd. in Tax Appeal No.337 of 2013. He placed on record copies both these decisions. Apart from the above, he placed upon reliance Special Bench decision of the ITAT in the case of CIT Vs. Vireet Investment P. Ltd. 165 ITD 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act, 1961, no disallowance under Section 14A was required to be made? Learned counsel for the respondents assessee, during the course of hearing, has fairly conceded that the first question has to be answered in favour of the Revenue and against the assessee in view of specific provisions in the Explanation 1 below Section 115JB(2) clause (f). The Assessing Officer it is stated had made an addition of Rs. 88,292/ to the book profits towards expenditure incurred having nexus with dividend income, which were exempt under Section 10(33). Recording the said statement, the first question is answered in favour of the appellant Revenue and against the respondent assessee. The assessee has relied upon the judgment of ITAT special bench in the case of Vireet Investment Pvt. Ltd. In this regard, it is pertinent to mention that Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax Ors. (2014) 264 CTR 0030 (Bom) : (2013) 96 DTR 0193 (Bom) : (2014) 361 ITR 0531 (Bom) : (2014) 221 Taxman 0166 (Bom); has held that the proceedings before DRP are extension of assessment proceedings. Therefore, they are not bound by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Rule 8D. The ITAT has rightly held that this being in the nature of disallowance, and with Explanation 115JB not specifically mentioning Section 14A of the Act, the addition of Rs. 89,00,000 was not justified. The view taken by the ITAT cannot be faulted with. It is consistent with the decision in Apollo Tyres Ltd. V. Commissioner of Income Tax 255 ITR 273 (SC) which held that the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J. The Court declines to frame a question on the above issue. 21. Apart from the above, we have a binding precedent before us one from Hon'ble jurisdictional High Court and other from the Hon'ble Bombay High Court. The question considered by the Hon'ble Gujarat High Court in the case of Alembic Ltd. (supra) is as under: Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s. 14A of the Act in computation of book profit u/s. 115JB of the Act is not as per law without appreciating that the amount disallowable under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no fault in the approach adopted by both the authorities. The addition under section 115JB of the Act of a sum of Rs. 1,14,43,040/ when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question No.1, this deletion requires to be confirmed. 8. Taking into consideration the evidence on record and considering the decision of this court in the case of Commissioner of Income tax vs. Gujarat State Fertilizers Chemicals Ltd. (supra), we are of the opinion that issue Nos.(iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed. 23. Similarly, Hon'ble Bombay High Court has formulated following question in the case of Bengal Finance Investments P. Ltd. (supra) and replied as under: (b) Whether on the facts and in the circumstances of the case, and in law, the ITAT is justified in deleting the addition of Rs. 78,84,387/ und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in ITA No.198/Ahd/ 2023 for A.Y. 2016-17. Ground Nos.1 to 4 are relating to disallowance made u/s. 14A rwr 8D of the Act, which was confirmed by the Ld CIT[A]. Ld Counsel Mr. Soumitra Choudhury appearing for the assessee filed a detailed Written Submission on this issue which reads as follows: Assessee most respectfully submits that the impugned disallowance is contrary to law and is unsustainable for the following reasons: i. Reliance on CBDT Circular No.05/2014 by the AO to make disallowance u/s. 14A of the Act is bad in law: The AO primarily placed reliance on the Circular issued by the Central Board of Direct Taxes (CBDT) viz., Circular No. 05/2014 dated 11.02.2024 wherein it was clarified by the Board that the intention of the legislature was to disallow deductions on expenditures incurred for earning exempt income irrespective of the fact whether any such income has been earned during the said financial year or not. In Chemivest Ltd. v. CIT 317 ITR 33 (Delhi), the Hon'ble Delhi High Court while dealing with the same issue observed that the expression 'does not form part of the total income' in section14A envisages that there should be an actual receipt of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the relevant previous year. Therefore, Section14A would not apply to a notional/anticipated exempted income that is not earned in the relevant previous year. The Hon'ble High Court of Delhi in the case of Prl.CIT Vs. IL FS Energy Development Co. Ltd. (2017) 84 taxmann.com 186(Delhi) has held that CBDT Circular upon which extensive reliance is placed by revenue does not refer to rule 8D(1) 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. The Court held that the process of interpretation adopted by the CBDT will be a truncated reading of section 14A 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, the question of taxation of 'notional income' does not arise. For all of the aforementioned reasons, the the Court held that the CBDT Circular dated 11-5-2014 cannot override the expressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other provisions of the Income-tax Act an provide that no deduction shall be allowed in relation 1 exempt income, notwithstanding anything to the contra contained in this Act. 7. This amendment will take effect from 1st April, 20 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years. Thus, 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 apply in relation to the assessment year 2022-23 and subsequent assessment years. This Explanation was considered by ITAT Guwahati Bench in ACIT -Vs- Williamson Financial Services Ltd 196 ITD 422 [Guw], which observed as under:- In order to remove the prevailing doubts about the interpretation of the provisions of section14A and to overcome the interpretation given by the various High Courts regarding the applicability of provisions of section14A and to make the intention of the legislation clear and to make it free from any misinterpretation, the Parliament has brought in an Explanation to section 14A.Further, sub-section (1) of section 14 has been amended so as to include a non obstante clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Apex Court in above judgment that Whether dividend is earned or not becomes immaterial is in the context of holding the shares as stock-in-trade and it becomes a business activity of the assessee to deal in those shares as a business proposition. There is no applicability of section14A in respect of the shares held as stock-in-trade and that is why it is observed that in respect of stock-in-trade whether dividend is earned or not becomes immaterial. Similar view was expressed by Hon'ble Delhi High Court in Pr.CIT v. PNB Housing Finance Ltd (2023 146 taxmann.com 5 following Maxopp's case (supra) holding that where shares were held by assessee, housing finance company, as stock-in-trade, dividend earned on shares would not attract section 14A. Secondly in para 41 of the judgement, Hon ble Apex Court has approved the theory of apportionment while disallowance u/s. 14A read with Rule 8D as under:- 41. Having regard to the language of Section14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind the assessee, suomoto disallowance under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO u/s. 14A of the Act, cannot be sustained and deserves to be deleted. (iii) Since the Own funds of the Assessee were much more than the investments made by the Assessee, no disallowance can be made u/s. 14A of the Act on account of interest expenditure: As against Investments of Rs. 2652.4 crore, assessee has interest free funds of Rs. 2928.17 crore/- as at 31.03.2016 i.e. almost 1.1 times of the advances (Pg.55 of CIT(A)'s order). The said fact is not in dispute. The CIT(A)'s contention that some of the reserves do not generate cash and hence cannot be considered as available for making investments is contrary to judicial pronouncements on the subject as no such condition has been laid down in those decisions. The Hon'ble Karnataka High Court in the case of Commissioner of Income Tax Anr. Vs. Microlabs Ltd., [2016] 383 ITR 490 (Karn) summed up the law on the issue after noticing the availability of own funds as per Balance Sheet of the Assessee and after digesting all decisions on the subject. The Hon'ble Court noticed the decision of the Hon'ble Bombay High Court in Reliance Utilities Power Ltd 313 ITR 340 (Bom) (confirmed by the Hon'ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts of the assessee that the claim of disallowance made by the assessee is not enough or is not adequately related to exempted income. The compliance of dissatisfaction has to be substantive and not merely a pretence. The following cases support the above proposition Dy. CIT v. Galileo India (P.) Ltd. (2017) 88 taxmann.com 739(Del-Trib); CIT v. Brigade Enterprises Ltd. (2021) 124 taxmann.com 237(Kar); CIT v. Sociedade De Fomento Industrial (P.) Ltd. (2021) 123 taxmann.com 38(Bom); Essilor India (P.) Ltd. v. Dy. CIT (2022) 137 taxmann.com 60(Kar.); Pr. CIT v. Godrej Boyce Mfg. Co. Ltd. (2023) 149 taxmann.com 222(Bom); Pr. CIT v. PTC India Financial Services Ltd. (2023) 146 taxmann.com 174 (Delhi); Pr. CIT v. TV Today Network Ltd. (2022) 141 taxmann.com 275(Delhi); Pr. CIT v. West Bengal Infrastructure Development Finance Corpn Ltd. (2022) 143 taxmann.com 135(cal.); Pr. CIT v. West Bengal Infrastructure Development Finance Corpn. Ltd. (2023) 149 taxmann.com 181 (Cal); Infrastructure Logistics (P.) Ltd. v. Jt. CIT (2022) 141 taxmann.com 24(Panaji-Trib.); Jt. CIT v. Rare Enterprises (2021] 124 taxmann.com 71(Mum-Trib); Kodagu District Co-operative Central Bank Ltd. v. Asst. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une 2016 limiting the disallowance the aggregate of the amount of expenditure directly relating to income which does not form part of total income and an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not form part of the total income. It is also provided that the amount shall not exceed the total expenditure claimed by the Assessee. 13. In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later AYs. 14. In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1st April 1962, it was clarified that expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income . The object behind Section 14A was to provide that no deduction shall be made in respect of any expenditure incurred by the Assessee in relation to income which does not form part of the total income und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As explained in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration. 20. In M/s. Redington (India) Ltd. v. The Additional Commissioner of Income Tax, Company Range - V, Chennai (order dated 23rd December, 2016 of the High Court of Madras in TCA No. 520 of 2016), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is clearly relatable to the earning of the actual income and not notional income or anticipated income. It was further explained that, The computation of total income in terms of Rule 8D is by way of a determination involving direct as well as indirect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is for the purpose of making or earning such income. Section 14A of the Act on the other hand contains the expression in relation to income which does not form part of the total income. The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act. 23. The decisions of the ITAT in ACIT v. Ratan Housing Develop ment Ltd. (supra) and Relaxo Footwear Ltd. v. Addl. CIT (supra), to the extent that they are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. The Explanation to Section 14A of the Income Tax Act, 1961 is inserted vide Finance Bill, 2022. The Ministry of Finance, Union of India, issued Memorandum Explaining the Provisions in the Finance Bill, 2022. The relevant extract of the said Memorandum reads as under: Clarification in respect of disallowance under Section 14A in absence of any exempt income during an assessment year. 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. The CBDT issued Circular No.5 of 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 disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 has held that a retrospective provision in a tax act which is for the removal of doubts cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced herein below (page 316 of 279 ITR) The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. S.R. Patton [(1998) 8 SCC 608]. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4-2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. Co. Ltd., (1995) 4 SCC 485, 494. It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3 : 5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise 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 Ku. Sonia Bhatia v. State of U.P., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are it is declared or for the removal of doubts . 18. There was and is no ambiguity in the main provision of Section 9(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il Industries Development Board, SLP (Civil) Diary No.2755/2019. Thus, we find no ground to interfere with the order passed by the learned tribunal. Accordingly, the appeal is dismissed and the substantial questions of law are answered against the revenue. 17. In Avantha Realty Ltd. (supra), the High Court of Calcutta, relying on the decision of Delhi High Court, rendered in Pr.CIT Vs. Era Infrastructure (India) Ltd., Judgment dated 20.07.2022 (supra), has dismissed the appeal filed by the Revenue and held that the Explanation inserted to Section 14A by Finance Act, 2022 will be applicable prospectively. The operative portion of the decision in Avantha Realty Ltd. (supra) reads as under: Substantial questions Nos. D E pertain to the deletion of the disallowance made under Section 14A of the Act. The learned Tribunal took note of the decision of the High Court of Delhi in Era Infrastructure (India) Ltd. (supra), which had taken note of the decision in the case of Cheminvest Ltd. (supra), wherein it was held that amendment by the Finance Act, 2022 of Section 14 A of the Act by inserting a non-obstante clause and explanation we take effect from 01.04.22 and cannot be presumed to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restraining ourselves from making harsh comments, we can only say that such a conduct of the members of an authority, which is discharging judicial functions, cannot be appreciated. Any authority discharging judicial functions is expected to maintain consistency in its views in respect of judicial matters because any unjust deviation may affect the credibility of such authority. 14.2. Respectfully following the above judicial precedents rendered by various High Courts, we hold that the reliance placed by the Ld CIT[A] to confirm the disallowance made u/s. 14A is legally not tenable and liable to be deleted. 15. Third fold of submission of the assessee namely own funds of the Assessee were much more than the investments made by the Assessee, hence no disallowance be made u/s. 14A of the Act on account of interest expenditure. It is seen from records as against Investments of Rs. 2652.4 crores, assessee has interest free funds of Rs. 2928.17 crores as on 31.03.2016 i.e. almost 1.1 times of the advances, which fact is not in dispute by the Revenue. The CIT(A)'s contention that some of the reserves do not generate cash and hence cannot be considered as available for making investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and proportionate disallowance was not warranted under section 14A of the Act . 15.2. Hon'ble Supreme Court in the case of South Indian Bank Ltd -Vs- CIT reported in [2021] 130 taxmann.com 178 (SC) held as follows: Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to exempt income not includible in total income (General) - Assessee-scheduled banks earned income from investments made in tax-free securities - Assessing Officer made proportionate disallowance of interest attributable to funds invested to earn tax free income under section 14A on grounds that separate accounts were not maintained for investment in tax-free securities - Whether since interest free own funds available with assessee exceeded their investments; investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A on ground that separate accounts were not maintained by assessee for investments and other expenditure incurred for earning tax-free income. 15.3. Respectfully following the above judicial precedents rendered by Hon ble Apex Court and various High Courts, we hold that the disallowance made by the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the Ist day of April, 2001. 7. On perusal of the aforesaid provisions, it is clear that to determine the amount of expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act-1961, the Assessing Officer can apply the method to calculate such expenditure as provided under Rule 8D of the Rules-1962 only if the Assessing Officer having regard to accounts of the assessee is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to the exempted income under the Act-1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer did not record any satisfaction under section 14(2) of the Act-1961 prior to invoking rule 8D, he could not have made any disallowance by applying rule 8D of the Rules-1962. 10. We are in agreement with the finding of facts arrived at by the Tribunal. Therefore, Question No. 2(A) as proposed by the Revenue cannot be termed as substantial question of law arising from the impugned order of the Tribunal. 16.2. Since this issue also now settled by Jurisdictional High Court we hold that the disallowance made invoking Rule 8 without recording dis-satisfaction by the Assessing Officer is against the provisions of section 14[2] and the addition is liable to be deleted. 17. In the result the Ground Nos. 1 to 4 raised by the assessee are hereby allowed. 18. Ground Nos. 5 to 6 are relating to Ld. CIT(A) has erred in law and facts in confirming the action of AO in confirming the disallowance of depreciation on goodwill arising out of amalgamation of Rs. 132,47,53,370/- u/s. 32 of the Act. Both the Ld Counsel Mr. Soumitra Choudhury appearing for the assessee and the Ld CIT DR Shri Prithviraj Meena appearing for the Revenue filed a detailed Written Submission. 18.1. Before entering i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved with the notice and was asked to raise objection (if any) to the Scheme of Amalgamation. However, despite service of notice, the Income-tax Department choose not to raise any objection before NCLT (the relevant observations of the NCLT are placed at page nos.100-114 @ 101, 102, 111 of Paper Book). 18.3. Our attention is also drawn to the finding of the AO in the assessment order at Page no.29, Para 5.2 that the Revenue is not challenging the Scheme of Amalgamation, but is merely challenging the claim depreciation on goodwill as a result of amalgamation. Thus the Ld Counsel submitted that once Revenue accepts Scheme of Amalgamation duly approved by NCLT, then effect of such amalgamation has to be given in its entirety and accordingly, depreciation on resultant goodwill has to be allowed. Revenue cannot blow hot and cold simultaneously i.e. 'accept the scheme of amalgamation' but reject the claim of depreciation on the resultant goodwill'. 18.4. After hearing rival submissions, we directed the Revenue to get a report Whether the NCLT order dated 31-05-2017 was challenged by the Income Tax Department before National Company Law Appellate Tribunal or any Higher Forums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company to the amalgamating company is more than the net assets acquired by it, then the differential amount shall be treated as goodwill and the amalgamated company shall be eligible for claiming depreciation on such goodwill. Reliance is placed on following decisions: CIT vs. Smifs Securities Ltd. - (2012) 348 ITR 302 (SC); PCIT vs. Zydus Wellness Ltd. - (2017) 87 taxmann.com 82 (Guj); PCIT vs. Zydus Wellness Ltd. - SLP 29859 of 2018 (SC); Urmin Marketing P. Ltd. - (2020) 122 taxmann.com 40 (Ahd); KIFS International LLP vs. DCIT - ITA 557/Ahd/2022; M/s. Suzlon Global Services Ltd. vs. PCIT - ITA 67-68/ Ahd/2021 20. Per contra Ld CIT DR Shri Prithviraj Meena appearing for the Revenue filed a detailed Written Submission on this issue which are nothing but the findings recorded by the Ld AO, which were confirmed by the Ld CIT[A]. 21. We have given our thoughtful consideration and perused the materials available on record including the Paper Book and Case laws compilation. Facts of the case is already discussed in paragraph 4 to 5.1 herein above, therefore the same is not repeated here. 21.1. The Ld AO denied the claim for depreciation on goodwill by placing reliance on few statutor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is created owing to difference between price at which amalgamation or merger takes place and there is a difference between the net worth of the business taken over and consideration paid for acquiring the business. Now the amended provisions substituted clause (a) of subsection (2) to provide that in relation to a capital asset, being goodwill of a business or profession, or a trade mark or brand name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours, only on price paid for purchase of the Asset. 22. Further in the following decisions, the above provisions have been considered and it has been held that such aspects will not be valid grounds to deny the claim of depreciation on goodwill. 22.1. Hon ble Supreme Court in the case of CIT vs. Smifs Securities Ltd. - (2012) 348 ITR 302 (SC) held as follows : Question No. [b]: Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said Section? Answer: In the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding. 7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Smifs Securities Ltd. (supra). On the other hand, if the observations of the Assessing Officer can be seen as his findings that the claim itself was baseless, there was no discussion or reference to any material to enable him to come to such a conclusion. 7. In the result, tax appeal is dismissed. 22.3. Revenue s SLP against the above judgement is also dismissed by Hon ble Supreme Court in SLP Diary No.29859 of 2018 dated 08-10-2018 as covered matter by following judgement of the Supreme Court in case of Smifs Securities Ltd. 22.4. Further the above judgement of Apex Court is followed by the Co-ordinate Bench of this Tribunal in the case of M/s. Urmin Marketing Pvt. Ltd. -Vs- DCIT (2020) 122 taxmann.com 40 (Ahd) and held that goodwill is a part and parcel of intangible assets and assessee is eligible for claim of depreciation on goodwill by observing as follows: Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of (Intangible assets) - Assessment year 2015-16 - A company namely, 'UPPL' amalgamated with assessee-company and all assets and liabilities of 'UPPL' became assets and liabilities of assessee - In return, assessee paid certain amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 43(1), explanation 2 to section 43(6)(c) of the Act cannot be applied to the case on hand. 32.5. Normally, the issue/question of the goodwill arises when one company is acquired by another company. In other words, when one company transfers its business to another company against the consideration, the difference between the net value of the assets acquired and the purchase consideration paid by the transferee is regarded as goodwill/capital reserve as the case may be. The succeeding question arises whether such goodwill acquired by the assessee is eligible for depreciation under the provisions of section 32 of the Act. In this connection, we are inclined to refer to the provisions of section 32(1) of the Act which reads as under: 32. (1) In respect of depreciation of (i) buildings, machinery, plant or furniture, being tangible assets; ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the Ist day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed 32.6 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by Tribunal. There is no reason to interfere with the factual finding. (Para 6) From the above, there remains no ambiguity that the goodwill generated in the scheme of amalgamation is acquired by the assessee. Thus, in our considered view the assessee has complied all the conditions provided under section 32 of the Act. Accordingly, we are not convinced with the finding of the authorities below. 23. In our considered view, the basic fallacy in the approach of the Ld AO in this case is that he has proceeded further on the premise that the goodwill in question was transferred from amalgamating company to amalgamated company and hence depreciation on the same is not allowable in the eye of law. However, in the present case, as a matter of fact, goodwill in question is a result of amalgamation and has come into existence only pursuant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r provision of the IT Act. Once those provisions are applied, in some situations (like that of business re-organization) there could be no depreciation on account of actual cost being zero and the WDV of that asset in the hands of the predecessor/amalgamating company being zero. It is further stated that goodwill, in general, is not a depreciable asset and it depends upon how the business runs, goodwill may see appreciation and in the alternative no depreciation to its value. Hence, for the said reasons assessee s have been barred from claiming depreciation on goodwill. These amendments are to take effect from 01st April 2021 and will accordingly apply to the assessment years 2021-22 and subsequent assessment years. Therefore the amendments in question will have no impact on the claim of the assessee company in this appeal which pertains to the Asst. Years 2016-17 and 2017-18. In view of the above findings depreciation on goodwill created as a result of amalgamation is allowable and directed the JAO to allow the same by passing appropriate orders. 24.2. In the result the Ground Nos. 5 6 raised by the assessee are hereby allowed. 25. Remaining Ground Nos. 7 to 11 are general and con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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