Tca/421/2012 Of The Commissioner Of Income Tax v. M/S Accel Limited

IN THE HIGH COURT OF JUDICATURE AT MADRAS The Honourable Mr.Justice T.S.SIVAGNANAMandThe Honourable Mr.Justice SATHI KUMAR SUKUMARA KURUP T.C.A.No.421 of 2012 The Commissioner of Income Tax,Chennai... Appellant M/s.Accel Limited,3[rd] Floor, 75-Nelson Manickam Road,Aminjikarai, Chennai-600 029... Respondent Appeal under Section 260A of the Income Tax Act, 1961against the order dated 10.07.2012 made in I.T.A.No.906(Mds)/2012 on the file of the Income Tax Appellate Tribunal 'D' Bench,Chennai for the assessment year 2002-03. Against the order of Commissioner of Income Tax, Chennai-I,Chennai dated 19.03.2012 made in C.No.218/12/CIT-1/263/2011-12and against the order of Deputy Commissioner of Income Tax,CompanyCircle1(1),Chennaidated18.11.2009inPA/G.I.R.No.AAACA3042P/AX6-061 for the Assessment year 2002-2003.For Appellant:Mr.T.Ravikumar,Senior Standing CounselFor Respondent :Mr.R.Sivaraman JUDGMENT (Delivered by T.S.Sivagnanam, J.) This appeal, by the Revenue, filed under Section 260A of theIncome Tax Act, 1961 (hereinafter referred to as “the Act”), isdirected against the order dated 10.07.2012, made inI.T.A.No.906(Mds)/2012 on the file of the Income Tax AppellateTribunal 'D' Bench, Chennai (for brevity “the Tribunal) for theassessment year 2002-03. 2.The tax case appeal was admitted on 30.11.2012 on thefollowing substantial questions of law:- https://hcservices.ecourts.gov.in/hcservices/ “1.Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in setting aside theRevision order passed u/s.263 of the Income TaxAct, 1961? and 2.Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in holding that thedisallowance made under Section 14A was notapplicable to the Assessment Year 2002-03 as thesame was brought into the statute book by FinanceAct, 2006 with effect from 01.04.2007?” 3.The assessee filed its return of income disclosing a lossand the return was processed under Section 143(1) of the Act andwas accepted. Subsequently, during the scrutiny proceedings, itwas observed that the assessee had received a loan amounting toRs.3 Crores from M/s.Accel ICIM, a company in which, theassessee holds more than 10% of the shares carrying votingrights. The Assessing Officer was of the view that in terms ofthe provisions of Section 2(22)(e) of the Act, any loan oradvance received from a company in which, the assessee holdsmore than 10% of the shares with voting powers, shall be deemedto be a dividend taxable under the Act. For such reason, noticeunder Section 148 of the Act dated 28.01.2009 was issued. Theassessee objected to the reopening of the assessment. Theobjections were disposed of by order dated 23.07.2009 statingthat only during the remand proceedings, when the ledger accountwas examined, it came to the knowledge of the Assessing Officerthat a sum of Rs.3 Crores has been actually received by theassessee from their subsidiary company in the year relevant tothe assessment year 2002-03. Therefore, the reassessment isvalid. Further, it was pointed out that during the course ofscrutiny assessment, it appeared in the books of the assesseethat they have received a loan of Rs.3 Crores from itssubsidiary company. The Assessing Officer discussed variousaspects and completed the assessment vide order dated18.11.2009. 4.The Commissioner of Income Tax, Chennai-I (for brevity,“the CIT”) on perusal of the assessment order dated 18.11.2009,observed that the assessee has received dividend to the tune ofRs.2,56,12,828/- and such income was claimed to be exempt underSection 10(33) of the Act and as per the provisions of Section14A of the Act, no deduction is allowable in respect ofexpenditure incurred in relation to income, which does not formpart of the total income. Further, the assessee did notdisallow any expenditure in relation to earning of such exemptdividend income while computing taxable income and this aspect has not been examined by the Assessing Officer and the failurehas resulted in allowance of deduction of expenditure, which wasotherwise not allowable under Section 14A of the Act.Therefore, the CIT was of the prima facie view that theassessment was erroneous, insofar as it is prejudicial to theinterest of the Revenue and notice under Section 263 of the Actwas issued. 5.The assessee responded to the proceedings by contendingthat the M/s.Accel Frontline Limited was their subsidiarycompany, no bank charges were debited/involved in respect of thedividend receipt and Section 14A permits disallowance ofexpenditure incurred by the assessee in relation to income,which does not form part of the total income under the Act andsince no expenditure was incurred or claimed in the return, inrelation to the dividend income, there was no question ofdisallowance of any expenditure. 6.The issue relating to the computation of limitation forinitiating proceedings under Section 263 was also raised by theassessee. The CIT by order dated 19.03.2012, rejected the standtaken by the assessee holding that the assessee receiveddividend and the entire income was claimed as exempt underSection 10(33) of the Act and they did not admit any expenditurerelating to the said receipt and as per the provisions ofSection 14A, no deduction is permissible in respect ofexpenditure in relation to exempt income. Accordingly, the CITheld that the order of assessment was erroneous and prejudicialto the interest of Revenue. 7.With regard to the limitation issue, which was raised bythe assessee, it was held that the contentions does not meritacceptance. Challenging the said order, the assessee had filedappeal before the Tribunal. So far as the issue relating tolimitation is concerned, it was decided against the assesseeholding that the assessment order passed by the AssessingOfficer under Section 143(3) read with Section 147 of the Act byitself is independently amenable to revisional jurisdiction ofthe CIT. Against such finding, the assessee is not on appealbefore us. 8.The only issue is with regard to whether the disallowancemade under Section 14A was justified and whether the CIT couldhave invoked the power under Section 263 of the Act 9.Mr.T.Ravikumar, learned Senior Standing Counsel appearingfor the appellant submitted that the Tribunal has rendered anerroneous finding by observing that Section 14A has been broughtinto statute book by Finance Act, 2006 with effect from01.04.2007 ignoring the fact that it was inserted by Finance 8.The only issue is with regard to whether the disallowancemade under Section 14A was justified and whether the CIT couldhave invoked the power under Section 263 of the Act 9.Mr.T.Ravikumar, learned Senior Standing Counsel appearingfor the appellant submitted that the Tribunal has rendered anerroneous finding by observing that Section 14A has been broughtinto statute book by Finance Act, 2006 with effect from01.04.2007 ignoring the fact that it was inserted by Finance Act, 2001 with retrospective effect from 01.04.1962. Thiserroneous finding, in the submission of the learned counsel, isan erroneous conclusion arrived at by the Tribunal. In supportof his contention, the learned counsel placed reliance on thedecision of the Hon'ble Supreme Court in the case of MaxoppInvestment Ltd. vs. CIT reported in (2018) 402 ITR 0640 (SC) andby referring to paragraph 32 of the judgment, it is submittedthat as per Section 14A(1) of the Act, deduction of thatexpenditure is not to be allowed, which has been incurred by theassessee “in relation to income, which does not form part ofthe total income under the Act”. It is that expenditure alone,which has been incurred in relation to the income, which isincludible in total income that has to be disallowed and if anexpenditure incurred has no capital connection with the exemptedincome, then such an expenditure would obviously be treated asnot related to the income that is exempted from tax and suchexpenditure would be allowed as business expenditure. To put itdifferently, such expenditure would then be considered asincurred in respect of other income, which is to be treated aspart of total income. Further, the learned counsel alsoreferred to the findings recorded by the Hon'ble Supreme Courtin paragraphs 33 and 34 of the judgment. Therefore, it issubmitted that the Tribunal has committed a serious error inallowing the appeal filed by the assessee. 10.In reply, Mr.R.Sivaraman, learned counsel appearing forthe assessee submitted that the effect of retrospectiveamendment of Section 14A read with Rule 8D is no longer resintegra and has been settled by the Hon'ble Supreme Court in thecase of CIT vs. Essar Teleholdings Ltd. reported in (2018) 401ITR 445 (SC). It is further submitted that de hors the saidissue, the Tribunal has also gone into the aspect as to whetherthe CIT without even recording any prima facie finding to makeout a case that certain amount claimed by the assessee asdeduction in its computation income de facto relating to theearning of tax-free income, held that reassessment could nothave been made. Therefore, it is submitted both on the legalissue as well as on the exercise of the power of the CIT underSection 263 that, the Tribunal has rightly held in favour of theassessee. 11.We have elaborately heard the learned counsels for theparties and carefully perused the materials placed on record. 12.The undisputed fact being that Section 14A stood insertedby Finance Act, 2001 with retrospective effect from 01.04.1962.If such is the situation whether based on such insertion, wouldit be a case where the Assessing Officers could be entitled toreopen the assessment. The case on hand appears to be one suchcase because the notice under Section 148 was issued on 28.01.2009, presumably taking note of the fact that theinsertion of Section 14A was made with retrospective effect from01.04.1962. Identical issue was subject matter of considerationin the case of Essar Teleholdings Ltd. (supra). The question,which fell for consideration before the Hon'ble Supreme Courtwas whether sub-section (2) and sub-section (3) of Section14Ainsertedwitheffectfrom01.04.2007willapply to all pending assessments? And whether Rule 8D isretrospectively applicable? 28.01.2009, presumably taking note of the fact that theinsertion of Section 14A was made with retrospective effect from01.04.1962. Identical issue was subject matter of considerationin the case of Essar Teleholdings Ltd. (supra). The question,which fell for consideration before the Hon'ble Supreme Courtwas whether sub-section (2) and sub-section (3) of Section14Ainsertedwitheffectfrom01.04.2007willapply to all pending assessments? And whether Rule 8D isretrospectively applicable? 13.It is the submission of Mr.T.Ravikumar, learned SeniorStanding Counsel that the substantial questions of law, raisedby the Revenue in this appeal are nothing to do with sub-section(2) or sub-section (3) of Section 14A or with regard to Rule 8D,but only with regard to the finding of the Tribunal that Section14A(1) came into the statute book by Finance Act, 2006 witheffect from 01.04.2007. 14.Before we consider the said submission, we shall takenote of the decision of the Hon'ble Supreme Court in EssarTeleholdings Ltd. (supra). It was argued by the Revenue thatthe provisions of Section 14A being clarificatory in nature andRule 8D is a procedural provision, which provides only amachinery for the implementation of sub-sections (2) and (3),Rule 8D is retrospective in nature. Further, it was submittedthat the machinery provisions by which the charging section isto be implemented or workable are to be given retrospectiveeffect which is co-terminus with the period of operation of themain charging provision. It was further submitted that thecharging Section, i.e., Section 14A admittedly beingretrospective, the machinery provision, i.e., Rule 8D has alsoto be retrospective. Answering the said submission was notaccepted by the Hon'ble Supreme Court and while answering thesaid issue, it was held as follows:- “32. Explanatory memorandum issued with theFinance Bill, 2006 and the CBDT circular dated28.12.2006, thus, clearly indicates thatdepartment understood that sub-section (2) andsub-section (3) was to be implemented with effectfrom assessment year 2007-2008. The Rule 8Dprescribing the method was brought into statutebook with effect from 24.03.2008 to implementsub-section (2) and sub-section (3) with effectfrom assessment year 2007-2008, is clearindicator of the fact that a new method forcomputing the expenditure was brought in by therules which was to be utilized for computingexpenditure for the Assessment Year 2007-2008 andonwards. 33.When Section 14A was inserted by FinanceAct, 2001, it was with retrospective effect witheffect from 01.04.1962 where as Finance Act,2006, by which sub-section (2) and sub-section(3) to Section 14A were inserted, it was witheffect from 01.04.2006 which was mentioned inclause 1(2) of Finance Act, 2006 which was to thefollowing effect: "1(2). Save as otherwise provided in thisAct, Sections 2 to 57 shall be deemed to havecome into force on the 1st day of April, 2006."Rule 8D which was inserted by notificationdated 24.03.2008. Rule 1 sub-rule (2) provides asunder: "1. (1) These rules may be called the Income-tax (Fifth Amendment) Rules, 2008. (2). They shall come into force from date oftheir publication in the Official Gazette." It is, however, well settled that the mere dateof enforcement of statutory provisions does notconclude that the statute is prospective innature. The nature and content of statute have tobe looked into to find out the legislative schemeand the nature, effect and consequence of thestatute.” 15.The submission, which was pressed into service by theRevenue, was that Section 14A of the Act being clarificatory innature having retrospective operation, Rule 8D, which is amachinery provision, has also to be held to be retrospective tomake machinery provision workable. This submission was answeredagainst the Revenue on the following terms:- (2). They shall come into force from date oftheir publication in the Official Gazette." It is, however, well settled that the mere dateof enforcement of statutory provisions does notconclude that the statute is prospective innature. The nature and content of statute have tobe looked into to find out the legislative schemeand the nature, effect and consequence of thestatute.” 15.The submission, which was pressed into service by theRevenue, was that Section 14A of the Act being clarificatory innature having retrospective operation, Rule 8D, which is amachinery provision, has also to be held to be retrospective tomake machinery provision workable. This submission was answeredagainst the Revenue on the following terms:- “35.It is to be noted that Section 14A wasinserted by Finance Act, 2001 and the provisionswere fully workable without their being anymechanism provided for computing the expenditure.Although Section 14A was made effective from01.04.1962 but Proviso was immediately insertedby Finance Act, 2002, providing that Section 14Ashall not empower assessing officer either toreassess under Section 147 or pass an orderenhancing the assessment or reducing a refundalready made or otherwise increasing theliability of the assessees under Section 154, forany assessment year beginning on or before01.04.2001. Thus, all concluded transactionsprior to 01.04.2001 were made final and notallowed to be re-opened. 36.The memorandum of explanation explainingthe provisions of Finance Act, 2006 has clearlymentioned that Section 14 sub-section (2) andsub-section (3) shall be effective with effectfrom the assessment year 2006-07 alone which isanother indicator that provision was intended tooperate prospectively.” 16.Thus, a cumulative reading of the above decision willclearly show that the insertion of Section 14A withretrospective effect from 01.04.1962 is not with a view toreopen all concluded transactions prior to 01.04.2001 and thememorandum of explanation explaining the provisions of theFinance Act, 2006 has clearly mentioned that Section 14(2) andSection 14(3) shall be effective with effect from the assessmentyear 2006-07 alone, which is another indicator that theprovision was intended to operate prospectively. 16.Thus, a cumulative reading of the above decision willclearly show that the insertion of Section 14A withretrospective effect from 01.04.1962 is not with a view toreopen all concluded transactions prior to 01.04.2001 and thememorandum of explanation explaining the provisions of theFinance Act, 2006 has clearly mentioned that Section 14(2) andSection 14(3) shall be effective with effect from the assessmentyear 2006-07 alone, which is another indicator that theprovision was intended to operate prospectively. 17.Bearing the above legal principles in mind, if we examinethe order passed by the Tribunal, we find that the Tribunal hasnot committed an error in holding as if Section 14A(1) isoperational with effect from 01.04.2007. In fact, on a readingof paragraph 7 of the impugned order passed by the Tribunal, onegets an impression that the Tribunal was of the view that thesaid provision is operational with effect from 01.04.2001.However, on a cumulative reading of the finding of the Tribunalin paragraph 7 in its entirety, we find that what was intendedto be said by the Tribunal is that Section 14A of the Act hasbeen functionally made operative on introduction of Rule 8D andthe said Rule was inserted by Income-tax (Fifth Amendment)Rules, 2008 with effect from 24.03.2008 and therefore, Section14A read with Rule 8D is not applicable to the impugnedassessment year 2002-03. In this background, it was held thatSection 14A(1) itself has been brought into the statute book byFinance Act, 2006 with effect from 01.04.2007. In fact, thereappears to have been typographical error, since it should beSection 14A(2) and not Section 14A(1). Further, on a reading ofparagraph 7, it is seen that the Tribunal has reiterated thatthe functional operation of Section 14A is not applicable to theassessment year, which was impugned before it. Thus, we findthat the finding rendered by the Tribunal in paragraph 7 setsout the correct legal position. The Tribunal, not stopping withthat, examined the scope of enquiry made by the CIT to examineas to whether the revision order is sustainable or not. Ontaking into consideration the factual position, the Tribunalheld that general observations are not sufficient to hold anassessment order erroneous and prejudicial to the interests ofthe Revenue. It noted the submission of the assessee thatdividend income has been received from its hundred per centsubsidiary and the assessee has not incurred any expenditure whatsoever in earning that dividend income and therefore, therewas no occasion for the assessee to claim any such expenditurein computing its taxable income. The Tribunal found fault withthe CIT by observing that when such was the stand taken by theassessee, it is necessary for the CIT to at least record a primafacie finding that certain amount claimed by the assessee asdeduction in its computation of income de facto related toearning of tax-free income. Thus, it was held that in theabsence of any such prima facie finding, the reassessment waserroneous. Thus, we find that the Tribunal rightly held infavour of the assessee. 18.For all the above reasons, this tax case appeal, by theRevenue, stands dismissed and the substantial questions of law,framed for consideration, are answered against the Revenue. Nocosts. Sd/- Assistant Registrar(CS VIII) //True Copy// abr Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal 'D' Bench, Chennai. Chennai. 2.The Commissioner of Income Tax, Chennai-I, Chennai. Chennai. 3.The Deputy Commissioner of Income Tax, Company Circle 1(1), Chennai. T.C.A.No.421 of 2012 AJS (CO)PR (24/08/2021)