ORDER
Mahavir Singh, J.M.
1. These appeals of the Revenue are directed against the respective orders of the CIT(A)-IX, Chennai. The relevant assessment years involved in these appeals are 1996-97, 1997-98 and 1999-2000.
2. The only common issue in all these appeals of the Revenue is, as to whether reopening of assessment under Section 147 of the IT Act, 1961, is in violation of Section 14A of the Act or not in the given facts and circumstances of the case.
3. We have heard both the sides and gone through the case records. The briefly stated facts of the case are that the assessee claimed deduction under Section 80P(2)(e) of the Act to the extent of Rs. 53,15,566. While completing the original assessments under Section 143(3) of the Act for all the assessment years under consideration, the AO allowed the entire deduction. Subsequently, the AO issued notice under Section 148 of the Act and in reassessment, he restricted the deduction under Section 80P(2)(e) to the net receipts of Rs. 38,20,117 by reducing the expenditure of Rs. 14,95,449 from the gross receipts for the asst. yr. 1996-97. Before the AO, the assessee pleaded that in view of proviso to Section 14A of the Act, no reassessment under Section 147 of the Act or enhancement under Section 154 of the Act can be done for any assessment year beginning on or before 1st April, 2001. The assessee pleaded before the AO that for the relevant asst. yr. 1996-97, the assessment was completed on 31st July, 1998 and the provisions of Section 14A of the Act will not apply to completed assessments in view of proviso to the said section. The assessee has also relied on Board’s Circular No. 11 of 2001, dt. 23rd July, 2001 [(2001) 169 CTR (St) 1]. However, the AO relying on the decision of the Hon’ble Supreme Court in the case of Distributors (Baroda)(P) Ltd. v. Union of India and the provisions of Section 80AB of the Act, restricted the deduction under Section 80P(2)(e) of the Act to the net receipts by reducing the expenditure from the gross receipts in all these appeals. Aggrieved, the assessee preferred an appeal before the CIT(A). The CIT(A) relying on the proviso to Section 14A of the Act and the Circular No. 11 of 2001 dt. 23rd July, 2001, deleted the additions made by the AO and allowed the deduction by holding that reopening is not possible in view of proviso to Section 14A of the Act. Aggrieved, the Revenue is in appeals before the Tribunal.
4. First of all, we have gone through the provisions of Section 14A of the Act including proviso which reads as under:
14A. Expenditure incurred in relation to income not includible in total income.For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee 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 AO 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 1st day of April, 2001.
5. We have also gone through the Circular No. 11 of 2001, dt. 23rd July, 2001 which reads as under:
Restriction on reopening of completed assessments on account of provisions of Section 14AClarification regardingThe Finance Act, 2001, has inserted Section 14A in the IT Act, 1961, wherein it was specifically provided that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act. The amendment takes effect from 1st April, 1962.
2. Section 14A was introduced retrospectively in order to clarify and state position of law that any expenditure relatable to income which does not form part of total income cannot be set off against other taxable income. This section was not introduced with prospective effect, as that would have implied that before the introduction of the said provisions, expenditure incurred to earn exempt income was allowable.
3. Instances of reopening of old assessments, which had attained finality, after insertion of Section 14A in the Act, have come to the notice of the Board. Reopening of past completed assessments, having attained finality, on the basis of newly inserted provisions of Section 14A is likely to cause hardship to a large number of taxpayers and would result in increasing avoidable litigation.
4. The Board have considered this matter and hereby directs that the assessments where the proceedings have become final before the first day of April, 2001, should not be reopened under Section 147 of the Act to disallow expenditure incurred to earn exempt income by applying the provisions of newly inserted Section 14A of the Act.
5.This may be brought to the notice of all officers in your region immediately.
Further, the Departmental Circular No. 8 of 2002, dt. 27th Aug., 2002 [(2002) 178 CTR (St) 9] was issued elaborating the scope and effect of insertion of proviso to Section 14A of the Act by the Finance Act, 2002 w.e.f. 11th May, 2001 and the relevant circular reads as under:
23, Amendment of Section 14A23.1 Through the Finance Act, 2001, a new section namely 14A was inserted in the IT Act retrospectively w.e.f. 1st April, 1962 to clarify the intention of the legislature that no deduction shall be allowed in respect of any expenditure incurred by an assessee in relation to income which does not form part of the total income under the IT Act. The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh.
23.2 Through the Finance Act, 2002, a proviso to Section 14A has been inserted so as to clarify that the AO shall not reassess the cases 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 1st day of April, 2001.
23.3 This amendment takes effect retrospectively from 11th May, 2001, that is, the date on which the Finance Bill, 2001, received the assent of the President of India. (Section 10).
In view of the provisions of the Act and the circular issued by the CBDT, it is clarified that whether the expenditure incurred in relation to ‘exempted income’ is eligible for deduction or not. In this context, exempted income means, the income which does not form part of the total income under the IT Act, 1961.
6. Chapter III deals with the income which does not form part of the total income containing in Sections 10 to 13A of the Act. These are incomes which do not form part of the total income and phraseology used in Section 14A of the Act is that for the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee, in relation to the incomes which do not form part of total income. Under this Act, only the exempted income from the provisions of the IT Act, is eligible for this section. The provisions of Section 14A of the Act talk about the income which does not form part of the total income under this Act and not the deductions. The deductions are provided under Chapter VI-A from Sections 80A to 80U of the Act, etc. etc. Here, Chapter VI-A of the Act talks about the deduction in computing the total income of the assessee and not the exempted income. In the present case in hand, the assessee claimed deduction under Section 80P(2)(e) of the Act on the whole of the gross receipts without deducting the expenditure. It is to be noted that as to whether the phraseology used in Section 14A of the Act can be compared with the deductions to be made in computing the total income as per the provisions of Section 14A of the Act or not. The provisions of Section 14A of the Act cannot be applied to the provisions of Chapter VI-A (Sections 80A to 80U) where deductions are to be made in computing the total income and in no way, that can be compared with the exempted income which does not form part of the total income as provided in Chapter III containing in Sections 10 to 13A of the Act. The right to exemption in respect of the items listed under Sections 10 to 13A of the Act is absolute. For example, under Section 10(33) of the Act, dividend income was totally exempt from tax for the asst, yr. 1998-99 in respect of any income by way of dividends referred to under Section 115-O of the Act. Here, the expenditure incurred cannot be allowed against any other income. The provisions of Section 14A of the Act are introduced retrospectively w.e.f. 1st April, 1962 by the Finance Act, 2001 for the purposes of computing the total income under Chapter IV and no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such exempted income. But the provisions of Section 14A of the Act do not speak about the deductions to be made in computing the total income as per the provisions of Chapter VI-A (Sections 80A to 80U), even though as a result of such deductions, the taxable income is reduced wholly or partially.
7. In the present case in hand, the reopening was done as the income escaped due to excess claim of deduction under Section 80P(2)(e) of the Act by allowing full by the AO in the original assessment order passed under Section 143(3) of the Act. In the given facts and circumstances of the case, we fairly feel that the reopening by the AO is perfectly within the provisions of the law. Accordingly, we feel that the proviso to Section 14A of the Act and circulars cited above will not apply to the claim of deductions as provided in Chapter VI-A from Sections 80A to 80U of the Act. Hence, we find that the CIT(A) has erred in quashing the reassessment proceedings under Section 147/148 of the Act by holding that the proviso to Section 14A of the Act and circulars issued by the Board will apply. Accordingly, the CIT(A)’s order on jurisdiction is set aside but it is seen that the CIT(A) has not passed any order on merits. Hence, we set aside the issue to the file of the CIT(A) to decide afresh on merits after giving reasonable opportunity of being heard to the assessee.
8. In the result, the Revenue’s appeals are allowed for statistical purposes.