Pr. Commissioner Of Income Tax (Central)-2 v. M/S Era Infrastructure (India) Ltd

$~S-21 IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 204/2022 & CM APPL.31445/2022 PR. COMMISSIONER OF INCOME TAX (CENTRAL)-2 ..... AppellantThrough:Mr.Sanjay Kumar, Sr.StandingCounsel with Ms.Easha Kadian,Advocate. versus M/S ERA INFRASTRUCTURE (INDIA) LTD...... Respondent Through:None.%Date of Decision: 20[th]July, 2022 CORAM: HON’BLE MR. JUSTICE MANMOHANHON’BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMOHAN, J: (ORAL) 1.Present Income Tax Appeal has been filed challenging the Orderdated 10[th]March, 2021 passed by the Income Tax Appellate Tribunal(‘ITAT’) in ITA No.798/Del/2018 for the Assessment Year 2013-14. 2.Learned Counsel for the Appellant states that ITAT has erred in lawin deleting the disallowance of Rs.3,61,53,268/- made by the AssessingOfficer under Rule 8D of Income Tax Rules, 1962 read with Section 14A ofthe Income Tax Act, 1961 (‘the Act’). 3.He submits that the ITAT erred in relying on the decision of thisCourt in PCIT vs. IL & FS Energy Development Company Ltd., 2017 SCCOnline Del 9893 (wherein it has been held that no disallowance underSection 14A of the Act can be made if the assessee had not earned anyexempt income), as the revenue has not been accepted the said decision andhas preferred an SLP against the said decision. 4.Learned counsel for the petitioner also submits that in view of theamendment made by the Finance Act, 2022 to Section 14A of the Act byinserting a non obstante clause and an explanation after the proviso, achange in law has been brought about and consequently, the judgmentsrelied upon by the authorities below including PCIT vs. IL & FS EnergyDevelopment Company Ltd (supra) are no longer good law. The amendmentto Section 14A of the Act is reproduced hereinbelow:- “Amendment of section 14A.In section 14A of the Income-tax Act, -(a) in sub-section (1), for the words “For the purposes of”, thewords “Notwithstanding anything to the contrary contained in thisAct, for the purposes of” shall be substituted;(b) after the proviso, the following Explanation shall be inserted,namely:- “[Explanation.—For the removal of doubts, it is hereby clarifiedthat notwithstanding anything to the contrary contained in thisAct, the provisions of this section shall apply and shall be deemedto have always applied in a case where the income, not formingpart of the total income under this Act, has not accrued or arisenor has not been received during the previous year relevant to anassessment year and the expenditure has been incurred during thesaid previous year in relation to such income not forming part ofthe total income.]” 5.However a perusal of the Memorandum of the Finance Bill, 2022reveals that it explicitly stipulates that the amendment made to Section 14Awill take effect from 1[st]April, 2022 and will apply in relation to theassessment year 2022-23 and subsequent assessment years. The relevantextract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 arereproduced hereinbelow: “4. In order to make the intention of the legislation clear and tomake it free from any misinterpretation, it is proposed to insert anExplanation to section 14A of the Act to clarify that notwithstandinganything to the contrary contained in this Act, the provisions of thissection shall apply and shall be deemed to have always applied in acase where exempt income has not accrued or arisen or has notbeen received during the previous year relevant to an assessmentyear and the expenditure has been incurred during the saidprevious year in relation to such exempt income. 5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of the said section,so as to include a non-obstante clause in respect of other provisionsof the Income-tax Act and provide that no deduction shall beallowed in relation to exempt income, notwithstanding anything tothe contrary contained in this Act. 5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of the said section,so as to include a non-obstante clause in respect of other provisionsof the Income-tax Act and provide that no deduction shall beallowed in relation to exempt income, notwithstanding anything tothe contrary contained in this Act. 7. This amendment will take effect from 1st April, 2022 and willaccordingly apply in relation to the assessment year 2022-23 andsubsequent assessment years.” (emphasis supplied) 6.Furthermore, the Supreme Court in Sedco Forex International Drill.Inc. v. CIT, (2005) 12 SCC 717 has held that a retrospective provision in atax act which is “for the removal of doubts” cannot be presumed to beretrospective, even where such language is used, if it alters or changes thelaw as it earlier stood. The relevant extract of the said judgment isreproduced herein below: “9. The High Court did not refer to the 1999 Explanation inupholding the inclusion of salary for the field break periods in theassessable income of the employees of the appellant. However, therespondents have urged the point before us. 10. In our view the 1999 Explanation could not apply toassessment years for the simple reason that it had not come intoeffect then. Prior to introducing the 1999 Explanation, thedecision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] wasfollowed in 1989 by a Division Bench of the Gauhati High Courtin CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau)] . It foundthat the 1983 Explanation had been given effect from 1-4-1979whereas the year in question in that case was 1976-77 and said:(ITR p. 318) “[I]t is settled law that assessment has to be made withreference to the law which is in existence at the relevanttime. The mere fact that the assessments in question has(sic) somehow remained pending on 1-4-1979, cannot becogent reason to make the Explanation applicable to thecases of the present assessees. This fortuitous circumstancecannot take away the vested rights of the assessees athand.” 11. The reasoning of the Gauhati High Court was expresslyaffirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC165 : (2000) 241 ITR 312] . These decisions are thus authoritiesfor the proposition that the 1983 Explanation expressly introducedwith effect from a particular date would not effect the earlierassessment years. 12. In this state of the law, on 27-2-1999 the Finance Bill,1999 substituted the Explanation to Section 9(1)(ii) (or whathas been referred to by us as the 1999 Explanation). Section 5of the Bill expressly stated that with effect from 1-4-2000, thesubstituted Explanation would read: “Explanation.—For the removal of doubts, it is herebydeclared that the income of the nature referred to in thisclause payable for— (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part ofthe service contract of employment, shall be regarded as income earned in India.” The Finance Act, 1999 which followed the Bill incorporated thesubstituted Explanation to Section 9(1)(ii) without any change.13. The Explanation as introduced in 1983 was construed by theKerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49(Ker)] while following the Gujarat High Court's decision in S.G.Pgnatale [(1980) 124 ITR 391 (Guj)] to hold that the Explanationwas not declaratory but widened the scope of Section 9(1)(ii). Itwas further held that even if it were assumed to be clarificatoryor that it removed whatever ambiguity there was in Section9(1)(ii) of the Act, it did not operate in respect of periods whichwere prior to 1-4-1979. It was held that since the Explanationcame into force from 1-4-1979, it could not be relied on for anypurpose for an anterior period. income earned in India.” The Finance Act, 1999 which followed the Bill incorporated thesubstituted Explanation to Section 9(1)(ii) without any change.13. The Explanation as introduced in 1983 was construed by theKerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49(Ker)] while following the Gujarat High Court's decision in S.G.Pgnatale [(1980) 124 ITR 391 (Guj)] to hold that the Explanationwas not declaratory but widened the scope of Section 9(1)(ii). Itwas further held that even if it were assumed to be clarificatoryor that it removed whatever ambiguity there was in Section9(1)(ii) of the Act, it did not operate in respect of periods whichwere prior to 1-4-1979. It was held that since the Explanationcame into force from 1-4-1979, it could not be relied on for anypurpose for an anterior period. 14. In the appeal preferred from the decision by the Revenuebefore this Court, the Revenue did not question this reading of theExplanation by the Kerala High Court, but restricted itself to aquestion of fact viz. whether the Tribunal had correctly found thatthe salary of the assessee was paid by a foreign company. ThisCourt dismissed the appeal holding that it was a question of fact.(CIT v. S.R. Patton [(1998) 8 SCC 608] .) 15. Given this legislative history of Section 9(1)(ii), we can onlyassume that it was deliberately introduced with effect from 1-4-2000andthereforeintendedtoapplyprospectively[SeeCIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) :(1995) 215 ITR 165] . It was also understood as such by CBDTwhich issued Circular No. 779 dated 14-9-1999 containingExplanatory Notes on the provisions of the Finance Act, 1999insofar as it related to direct taxes. It said in paras 5.2 and 5.3. “5.2 The Act has expanded the existing Explanation whichstates that salary paid for services rendered in India shallbe regarded as income earned in India, so as to specificallyprovide that any salary payable for the rest period or leaveperiod which is both preceded and succeeded by service inIndia and forms part of the service contract of employmentwill also be regarded as income earned in India. 5.3 This amendment will take effect from 1-4-2000, andwill accordingly, apply in relation to Assessment Year2000-2001 and subsequent years.” 16. The departmental understanding of the effect of the 1999Amendment even if it were assumed not to bind the respondentsunder Section 119 of the Act, nevertheless affords a reasonableconstruction of it, and there is no reason why we should not adopt it. 17. As was affirmed by this Court in Goslino Mario [(2000) 10SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax lawis that the law to be applied is that which is in force in the relevantassessment year unless otherwise provided expressly or bynecessary implication. (See also Reliance Jute and IndustriesLtd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67] .) AnExplanation to a statutory provision may fulfil the purpose ofclearing up an ambiguity in the main provision or an Explanationcan add to and widen the scope of the main section [See SoniaBhatia v. State of U.P., (1981) 2 SCC 585, 598 : AIR 1981 SC1274, 1282 para 24] . If it is in its nature clarificatory then theExplanation must be read into the main provision with effectfrom the time that the main provision came into force [SeeShyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); BrijMohanDasLaxmanDas v. CIT,(1997)1SCC352,354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506] . Butif it changes the law it is not presumed to be retrospective,irrespective of the fact that the phrases used are “it is declared”or “for the removal of doubts”.” (emphasis supplied) 7.The aforesaid proposition of law has been reiterated by the SupremeCourt in M.M Aqua Technologies Ltd. V. Commissioner of Income Tax,Delhi-III, 2021 SCC OnLine SC 575. The relevant portion of the saidjudgment is reproduced hereinbelow:- (emphasis supplied) 7.The aforesaid proposition of law has been reiterated by the SupremeCourt in M.M Aqua Technologies Ltd. V. Commissioner of Income Tax,Delhi-III, 2021 SCC OnLine SC 575. The relevant portion of the saidjudgment is reproduced hereinbelow:- “22. Second, a retrospective provision in a tax act which is “forthe removal of doubts” cannot be presumed to be retrospective,even where such language is used, if it alters or changes the lawas it earlier stood. This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 as follows: 17. As was affirmed by this Court in Goslino Mario [(2000)10 SCC 165] a cardinal principle of the tax law is that thelaw to be applied is that which is in force in the relevantassessment year unless otherwise provided expressly or bynecessaryimplication.(Seealso RelianceJuteandIndustries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanationto a statutory provision may fulfil the purpose of clearing upan ambiguity in the main provision or an Explanation canadd to and widen the scope of the main section [See SoniaBhatia v. State of U.P., (1981) 2 SCC 585]. If it is in itsnature clarificatory then the Explanation must be readinto the main provision with effect from the time that themain provision came into force [See Shyam Sunder v. RamKumar, (2001)8SCC24; BrijMohanDasLaxmanDas v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P)Ltd., (1997) 5 SCC 482]. But if it changes the law it is notpresumed to be retrospective, irrespective of the fact thatthe phrases used are “it is declared” or “for the removal ofdoubts”. 18. There was and is no ambiguity in the main provision ofSection 9(1)(ii). It includes salaries in the total income of anassessee 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 oraccruing in India”. The amendment to the section by way ofan Explanation in 1983 effected a change in the scope ofthat judicial definition so as to include with effect from1979, “income payable for service rendered in India”. 19. When the Explanation seeks to give an artificialmeaning to “earned in India” and brings about a changeeffectively in the existing law and in addition is stated tocome into force with effect from a future date, there is noprinciple of interpretation which would justify reading theExplanation as operating retrospectively.” (emphasis supplied) 8.Consequently, this Court is of the view that the amendment of Section14A, which is “for removal of doubts” cannot be presumed to beretrospective even where such language is used, if it alters or changes thelaw as it earlier stood. 9.Though the judgment of this Court has been challenged and ispending adjudication before the Supreme Court, yet there is no stay of thesaid judgment till date. Consequently, in view of the judgments passed bythe Supreme Court in Kunhayammed and Others vs. State of Kerala andAnother, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Churchof South India Trust Association CSI Cinod Secretariat, Madras (1992) 3SCC 1, the present appeal is dismissed being covered by the judgmentpassed by the learned predecessor Division Bench in PCIT vs. IL & FSEnergy Development Company Ltd (supra) and Cheminvest Limited vs.Commissioner of Income Tax-VI, (2015) 378 ITR 33. 10.Accordingly, the appeal and application are dismissed. However, it isclarified that the order passed in the present appeal shall abide by the finaldecision of the Supreme Court in the SLP filed in the case of PCIT vs. IL &FS Energy Development Company Ltd (supra). MANMOHAN, J JULY 20, 2022TS MANMEET PRITAM SINGH ARORA, J