The Commissioner Of Income Taxchennai v. M/S. Ews Finance & Investments Ltd.,Dhun Building827, Anna Salaichennai 2

In the High Court of Judicature at Madras Dated : 5.9.2007 Coram :- The Honourable Mr.Justice K.RAVIRAJA PANDIANandThe Honourable Mrs.Justice CHITRA VENKATARAMAN Tax Case (Appeal) No.1205 of 2007 The Commissioner of Income TaxChennai. .. Appellant Vs M/s. EWS Finance & Investments Ltd.,Dhun Building827, Anna SalaiChennai 2 .. Respondent TAX CASE (APPEAL) under Section 260A of the Income Tax Actagainst the order of the Income Tax Appellate Tribunal Madras 'A'Bench dated 29.12.2006 made in I.T.A.No.2440/Mds/2005 for theassessment year 2001-02 against the order of the Commissioner ofIncome Tax (A) III Chennai, dated 18.8.2005 made in ITA No.105/2005-06/A-III for the assessment year 2001-2002 against order of companycircle II (1),Chennai -34 PAN/GIR No.AAACE 1989-Q-dated 18.3.2005. For Appellant:- Mrs. Pushya Sitaraman` Standing Counsel for Income Tax JUDGMENT JUDGMENT OF THE COURT WAS DELIVERED BY K.RAVIRAJA PANDIAN,J The appeal is filed by the revenue against the order of theIncome Tax Appellate Tribunal Madras 'A' Bench made inI.T.A.No.2440/Mds/2005 dated 29.12.2006. The relevant assessmentyear is 2001-02. 2. The assessment already completed in respect of theassessment year 2001-02 has been reopened by the assessing officerto disallow the expenditure attributable to exempt income fromdividend in view of the introduction of Section 14A of the IncomeTax Act and as such an order has been passed disallowing theexpenditure attributable to the exempted income. Aggrieved by the https://hcservices.ecourts.gov.in/hcservices/ order of the assessing officer, the assessee filed an appeal beforethe Commissioner of Income Tax (Appeals) on the ground that thereopening was contrary to the proviso appended to Section 14A. TheCommissioner of Income Tax (Appeals) allowed the appeal. TheRevenue in turn took the matter before the Income Tax AppellateTribunal and the Tribunal dismissed the appeal. Aggrieved by theorder of the Tribunal, the present tax case appeal is filed byformulating the following question of law:- 'Whether in the facts and circumstances ofthe case, the Tribunal was right in holding thatthe re-opening to disallow expenditure onexempted income as per Section 14A was bad in lawas the assessment year in question was 2001-02,when the return was filed only after theintroduction of the section ? 3. Learned counsel appearing for the Revenue submitted that theassessee filed its return in respect of the assessment year 2001-02only after the introduction of the section and as such the questionof opening up an assessment for an earlier year does not arise.He further contended that CBDT issued a circular in Circular No.11dated 23.7.2001, which explains the proviso appended to Section 14Aof the Act. As per the circular only where the assessments havebecome final before the 1[st] April 2001, they should not be reopenedunder Section 147 to disallow the expenditure u/s14A. In the caseon hand the return was filed only after 1.4.2001. When that is thefact, the question of finality of proceedings prior tointroduction of section does not arise at all. Hence the reasoningof the Commissioner of Income Tax (Appeals), which was confirmed bythe Tribunal is not correct. 4. We heard the arguments of the learned counsel and perusedthe materials on record. 5. Section 14A reads as follows: For the purposes of computing the total incomeunder this Chapter, no deduction shall beallowed in respect of expenditure incurred bythe assessee in relation to income which doesnot form part of the total income under thisAct.Provided that nothing contained in this sectionshall empower the Assessing officer either toreassess under Section 147 of pass an orderenhancing the assessment or reducing a refundalready made or otherwise increasing theliability of the assessee under section 154, https://hcservices.ecourts.gov.in/hcservices/ 4. We heard the arguments of the learned counsel and perusedthe materials on record. 5. Section 14A reads as follows: For the purposes of computing the total incomeunder this Chapter, no deduction shall beallowed in respect of expenditure incurred bythe assessee in relation to income which doesnot form part of the total income under thisAct.Provided that nothing contained in this sectionshall empower the Assessing officer either toreassess under Section 147 of pass an orderenhancing the assessment or reducing a refundalready made or otherwise increasing theliability of the assessee under section 154, https://hcservices.ecourts.gov.in/hcservices/ for any assessment year beginning on or beforethe 1[st] day of April 2001) 6. The said proviso was incorporated with the intention ofavoiding litigation in the issue in respect of all the assessmentyears prior to assessment year 2002-03. The relevant assessmentyear in this case is 2001-02, which is unequivocally covered by theproviso. The proviso prohibits reassessment for the assessment yearbeginning on or before 1[st] April 2001. Hence the reassessment made inthis case is against the statutory provisions. The circular reliedon by the counsel appearing for the Revenue to sustain her casethat the cases, wherein the finality has not been reached that couldbe brought within the ambit of Section 14A for the purpose ofreopening of an assessment reads as follows:- "ToAll CCITs,All DGITs. Subject : Restriction on re-opening of completedassessments on account of provisions of section 14A—Clarification regarding. Sir, The Finance Act, 2001, has inserted section 14A in theIncome-tax Act, 1961, wherein it was specificallyprovided that no deduction shall be allowed in respectof expenditure incurred by the assessee in relation toincome which does not form part of total income underthe Act. The amendment takes effect from April 1,1962. 2. Section 14A was introduced retrospectively in orderto clarify and state the position of law that anyexpenditure relatable to income which does not formpart of total income cannot be set off against othertaxable income. This section was not introduced withprospective effect, as that would have implied thatbefore the introduction of the said provisions,expenditure incurred to earn exempt income wasallowable. 3. Instances of reopening of old assessments, whichhad attained finality, after insertion of section 14Ain the Act, have come to the notice of the Board.Reopening of past completed assessments, havingattained finality, on the basis of newly inserted provisions of section 14A is likely to cause hardshipto a large number of taxpayers and would result inincreasing avoidable litigation. 4. The Board have considered this matter and herebydirects that the assessments where the proceedingshave become final before the first day of April, 2001should not be re-opened under section 147 of the Actto disallow expenditure incurred to earn exempt incomeby applying the provisions of newly inserted section14A of the Act. 5. This may be brought to the notice of all officersin your region immediately. Yours faithfully, (Sd.) Rahul Navin, Under Secretary (TPL-I)," provisions of section 14A is likely to cause hardshipto a large number of taxpayers and would result inincreasing avoidable litigation. 4. The Board have considered this matter and herebydirects that the assessments where the proceedingshave become final before the first day of April, 2001should not be re-opened under section 147 of the Actto disallow expenditure incurred to earn exempt incomeby applying the provisions of newly inserted section14A of the Act. 5. This may be brought to the notice of all officersin your region immediately. Yours faithfully, (Sd.) Rahul Navin, Under Secretary (TPL-I)," 7. From the reading of the above Circular , it is very clearthat the Circular has not stated anything as contended by thelearned counsel for the Revenue that even for the assessment year2001-02 this proviso can be invoked. The circular came to be issuedon the ground that the instances of reopening of old assessments,which had attained finality after insertion of section 14A of theIncome Tax Act were brought to the notice of the Board and the Boardupon considering all those cases, was of the view that reopening ofpast completed assessments, having attained finality on the basis ofthe inserted proviso to Section 14A would cause hardship to largenumber of taxpayers and would result in increasing avoidablelitigation. In those context, the Board considered the matter anddirected that the proceedings which have become final before 1[st]April 2001 should not be reopened under Section 147 of the Act todisallow expenditure incurred to earn exempt income by applying theprovisions of newly inserted section 14A of the Act. Further, thedirection appended has not at all been taken note of in thecircular. Dehors the proviso also on a reading of the circular,we are of the view that the circular would not in any way advancethe case of the Revenue that wherever the assessment has not beencompleted and attained finality that can be reopened. If thecontention is accepted that even for an assessment year which ispending before the hierarchy of authorities the assessing officer can invoke the provisions and reopen the assessment, which is not theintention of the legislature. Hence, we are not able to accept theargument of the learned counsel for the Revenue and the appealdeserves to be dismissed as no question of law involves. The taxcase appeal is dismissed. Sd/Asst.Registrar /true copy/Sub Asst.Registrarkrr/To1.The Assistant Registrar, Income-Tax Appellate Tribunal, III Floor,Rajaji Bhavan, Besant Nagar, Madras 90 2.The Commissioner of Income Tax (A)III, Chennai-34.3. The Assistant Commissioner of Income Tax, Company Circle II (1)Chennai 34. 4.The Additional Commissioner of Income Tax,Company Range-II, Chennai. GG (CO)km/9.10. Tax Case (Appeal) No.1205 of 2007