AI Drafter 
TaxTMI 
TaxTMI 
2012 (3) TMI 634
X X X X Extracts X X X X
X X X X Extracts X X X X
....ok place prior to introduction of the Finance Bill, 2004 in the Parliament on 8th July, 2004. 2. That the CIT(A) erred on facts and in law in directing the Assessing Officer to recompute the disallowance u/s 14A of the Act applying the Special Bench decision of the Tribunal in the case of Daga Capital Management Pvt. Ltd., without affording any opportunity of being heard to the appellant. 3. That the CIT(A) erred on facts and in law confirming the action of the Assessing Officer in charging the interest u/s 234B and 234D of the Act. The appellant craves leave to add, to amend, alter or vary from the above grounds of appeal at or before the time of hearing." 2. Adverting first to ground nos. 1 & 2 in the appeal, facts, in brief, as per relevant orders are that return declaring income of `Rs.5,45,00,000/- and exempted income of `Rs.276,75,30,877/- filed on 31.10.2005 by the assessee, after being processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), was selected for scrutiny with the service of notice u/s 143(2) of the Act. Inter alia, a following note was appended at the end of computation of income enclosed with the retu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee referred to provisions of sec. 294 of the Act and relied upon the decisions in CIT Vs. Nirmal Textile, 224 ITR 378, M/s Mitsu Industries Ltd. Vs. DCIT (2005) 98 TTJ 990 (Ahd), ITAT decision in the case of JCIT Vs. Arihant Industries Ltd. and Vinod Krishna Kaul, IPS Vs. UOI: AIR 1996 SC 753 (1996)1 SSC 41. However, the AO did not accept the submissions of the assessee and disallowed the amount of `Rs.4,69,15,726/- in terms of amended provisions of section 94(7) of the Act, relying inter alia, on the decisions in Tea Estates India vs. CIT,241 ITR 778(Mad.);K. Krishnaveni Vs. AAC,151 ITR 83(Mad.); CIT Vs. Mir Osman Ali Bahadur (1966) 59 ITR 666 (Supreme Court); & CIT Vs. Hongkong Oceans Shipping and Others,238 ITR 955 (Madras) . 3. On appeal, the ld. CIT(A) upheld the findings of the AO in the following terms: "4.4 I have carefully considered the submissions of the appellant and facts of the case. The issue involved is whether transactions entered into by the appellant during previous year before the introduction of proposed amendment in section 94(7) by the Finance (No.2) Bill, 2004 in the Parliament on 8th July 2004 shall be governed by the pre amended provisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T vs Graigmore Plantations India Ltd. (2002) 253 ITR 447 (Mad), held as under: "The law applicable to any assessment is the law that prevails as on the first of April of the relevant assessment year. " * Hon'ble Supreme Court in the case of Sedco Forex International Drill Inc vs. CIT (2005) 279 ITR 310 (SC) has also observed as under: "A cardinal principle of tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. " * Karnataka High Court in the case of Mithy Granite (P) Ltd. vs. ITO (2004) 266 ITR 151 (Ka) has also held as under: "The law that is required to be applied is that in force during the assessment year, unless otherwise provided expressly or by necessary implication. The only way to understand the amendment made to section 80HHC(2)(b)(ii) is to understand that is only from the date of coming into force of the said provision, that cut and polished granite would be entitled for the benefit of section BHHC of the Act while all other types of granites are not entitled for the benefit of the said provision. " ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eriod of three months prior to sale as specified in the said sub section did not provide sufficient deterrence to tax avoidance. The Finance (No.2) Act 2004 has amended sub-section (7) of section 94 so as to increase the holding period in respect of units from three months to nine months after the record sale. These amendments take effect from 1st April 2005 and apply in relation to assessment year 2005-06 and subsequent years." The above circular clearly explains intention of the legislature for introduction of the amendment which clearly provides that it was felt that for units the holding period of three months prior to sales did not provide sufficient deterrence to tax avoidance and, therefore, clause (b) of section 94(7) was substituted to increase the holding period in respect of units from three months to nine months after the record sale. In such cases the purposive construction should be applied, which is also known as mischief rule' as described in Heydon's case. Four aspects are to be taken into consideration while applying the principle of 'mischief rule' i.e. (i) what was the law before making the act (amendment), (ii) what wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....osses is to be excluded or included or conditions or allowances of deductions or exemptions, and the like matters, the law as it exists on first of April of the relevant assessment year shall be applicable for the assessment. In the instant case also, the issue was whether to exclude the short term capital loss on the transactions which has taken place during the relevant previous year in the computation of income or not. Thus, the law as exists on first day of April of the assessment year 2005-06 shall govern the assessment of the relevant assessment year. 4.4.3. It may also be noted that the case of Vinod Krishna Kaul, IPS Vs. Union of India (supra) relied upon by the appellant relates to the administrative law and not related to the fiscal law and, thus, the ratio of this decision is not applicable for income-tax purposes. It is a well settled principle in administrative law that no amendment can be made with retrospective effect, whereas in the Income-tax Act the amendment can be made by the legislature with retrospective effect also. In this regard, the Hon'ble Supreme Court in the case of CIT Vs. Varas International P. Ltd. (2008) 283 ITR 484 (S.C.) held as under:- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the aforesaid issue, af resh in accordance with law in the l ight of final outcome of the aforesaid Writ Petition filed by the assessee. With these directions, ground nos.1 and 1.1 in the appeal are disposed of. 6.. Ground no.2 in the appeal relates to disallowance u/s 14A of the Act. The AO noticed that the assessee claimed exemption in respect of dividend income of `276,75,30,877/-.To a query by the AO, seeking details of expenditure incurred in relation to the exempted income, the assessee replied that investment was made in the shares of various companies in order to retain the controlling interest of HCL group of companies and that it was difficult to segregate the expenses . However, the AO did not accept the submissions of the assessee and disallowed an amount of `25,26,726/- on account of portfolio management fee besides an estimated amount of ` `5 lacs out of administrative expenses, in terms of provisions of sec. 14A of the Act, the assessee having not furnished the relevant details of such expenses. 7. On appeal, the ld. CIT(A), following the view taken in the decision of ITAT Special Bench, Mumbai in the case of ITO vs. Daga Capital Investment (P) Ltd. In ITA n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e mandate of sect ion 14A is clear. It desires to curb the practice to claim deduct ion of expenses incur red in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exempt ion of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insert ion of sect ion 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act . In the past , there have been cases in which deduct ion has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incur red to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e. , gross income minus the expenditure. On the same analogy the exempt ion is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of sect ion 14A. In sect ion 14A, the first phrase is "for the purposes of computing the total income under this Ch....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable. How is Section 14A to be worked for the period prior to the introduction of Rule 8D? 41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such....