[DCIT vs. S.R.A. Systems Ltd.; ITA Nos. 1497 to 1499/Mds/2009, A.Y. 2000-01 to 2001-02 (Mds.) ITAT] Section 234D – Levy of interest u/s 234D came into force from 1st June, 2003 – Prospective nature – After the commencement of the assessment year – Interest could be levied only from 1st April, 2004, i.e., from the A.Y. 2004-05 – The law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date Deduction u/s 10B – Undertaking – Not be formed by splitting up or reconstruction of a business already in existence – Merely by shifting business from one place to another and keeping some of the plant and machinery as those were bearing charge of financial institution – Clauses (ii) and (iii) of sub-clause (2) to section 10A were not violated

Deduction u/s 10B – Undertaking – Not be formed by splitting up or reconstruction of a business already in existence – Merely by shifting business from one place to another and keeping some of the plant and machinery as those were bearing charge of financial institution – Clauses (ii) and (iii) of sub-clause (2) to section 10A were not violated

For the A.Y. 2000-01, the assessee had filed its return of income on 29th November, 2000. The assessee claimed that it was eligible for deduction u/s 10B. The return was processed on 28th March, 2002. Subsequently, the A.O. had reason to believe that income chargeable to tax had escaped assessment on account of the assessee company being ineligible for deduction u/s 10A. A notice dated 22nd March, 2007 was issued u/s 148 disallowing the entire claim of deduction u/s 10B. Further, the expenditure incurred for the renovation and repairs of the rented premises of the assessee company was disallowed by the A.O. on the ground that such expenses were in the nature of capital expenditure. The A.O. in his reassessment order noted that in terms of section 10B(ii) an undertaking in order to be eligible for deduction u/s 10B must not be formed by splitting up or reconstruction of a business already in existence. Further, he held that deduction u/s 10B was not available to the assessee in view of the provisions of section 10B(iii) which stipulate that eligible business is not formed by transfer to a new business of plant and machinery previously used for any purpose. The A.O. found that the assessee had not complied with both these conditions, hence it was not entitled to any deduction u/s 10B.

While completing the assessment u/s 143(3) r/w/s 147 for the A.Ys. 2000-01 and 2001-02, the A.O. disallowed the claim of deduction made by the assessee under sections 10A and 10B on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence. Similar disallowance was made in A.Y 2002-03 while passing an order u/s 143(3) r/w/s 263. The A.O. levied interest u/s 234D.

For the A.Y. 2002-03, on challenge the Tribunal set aside the order of the CIT after taking into consideration the decision of the Apex Court reported in 107 ITR 195 [Textile Machinery Corporation Limited vs. CIT] that held as follows:

‘… This is not a case of setting up of a new business, but only transfer of business place of existing business to a new place located in STPI area and thereafter, getting the approval from the authorities, the assessee becomes entitled to deduction u/s 10A. Merely because by shifting the business from one place to another and keeping some of the plant and machinery as those are bearing charge of financial institution, does not violate clauses (ii) and (iii) of sub clause (2) to section 10A.’

The order passed by the Income-tax Appellate Tribunal was challenged by the Department in T.C.A. No. 1916 of 2008 and the Division Bench of this Court by its judgment dated 26th October, 2018 confirmed the order of the ITAT dated 16th May, 2008 made in I.T.A. No. 2255/Mds/06 for the A.Y. 2002-03 and dismissed the appeal.

Aggrieved by the assessment order for the A.Ys. 2000-01 and 2001-02, the assessee filed appeals before the CIT(A). The Appellate Authority allowed the appeals by following the order of the Tribunal for A.Y. 2002-03. The Appellate Authority, while dealing with the levy of interest u/s 234D, held that the said section comes into effect only after the commencement of the assessment year and interest could be levied only for the A.Y. 2004-05, and therefore deleted the interest for the A.Ys. 2000-01, 2001-02 and 2002-03.

Aggrieved over the order of the CIT(A), the Department filed appeals before the Appellate Tribunal which confirmed the CIT(A) order and dismissed the appeals. While dismissing the appeals, the Tribunal held that interest u/s 234D cannot be levied for the A.Ys. 2000-01, 2001-02 and 2002-03. Further, while dismissing the appeals, the Tribunal followed the order in I.T.A. No. 2255/Mds/06 dated 16th May, 2008.

Still aggrieved, the Department filed the appeals before the High Court. The Court held that, in view of the judgment of the Division Bench of this Court, it is clear that the applicability of clauses (ii) and (iii) of sub-clause (2) to section 10B, the impugned order passed by the ITAT is proper. In view of the order passed by the ITAT of 16th May, 2008 in I.T.A. No. 2255/Mds/06 and the judgment passed by the Division Bench of this Court on 26th October, 2018 in Tax Case Appeal No. 1916 of 2008, the assessee company would be entitled to deduction u/s 10A and the disallowance made by the A.O. was not correct. For A.Y. 2002-03, since the order passed u/s 263 itself had been set aside, the cause of action for reassessment does not survive.

So far as the levy of interest u/s 234D is concerned, the Court held that the section came to be inserted by the Finance Act, 2003 with effect from 1st June, 2003. Prior to that, no interest was payable on refund in the event of an order for refund being set aside and the assessee is made to pay the same from the date of rectification order or the orders passed by the Appellate Authorities. A reading of the provisions of section 234D makes it clear that there is no indication in the language employed in the entire section that the Parliament intended to make this levy of tax on excess refund retrospective. On the contrary, after inserting this provision in the Act it is specifically stated that it comes into effect from 1st June, 2003. Though the amendment is by insertion, the Parliament has expressly stated that the amendment comes into effect from 1st June, 2003. Parliament has made its intention clear and unambiguous. In other words, it is not retrospective. Merely because the order of assessment was passed subsequent to the insertion of the said provision in the Act, would not make the said provision retrospective. The provision providing imposition of interest is a substantive provision. It is settled law that in the absence of any express words used in the provision making levy of interest retrospective, it can only be prospective (i.e.) from the date on which it came into force, viz., 1st June, 2003.

The Constitution Bench of the Apex Court in the case of Karimthuravi Tea Estate Ltd. vs. State of Kerala reported in 1966 60 ITR 262 SC held as follows:

‘…It is well settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year would not apply to the assessment for that year even if the assessment is actually made after the amendments come into force.’

The amended provision shall come into force only after the commencement of the assessment year and cannot be applied retrospectively unless it is specifically mentioned. Therefore, the law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date. Section 234D having come into force only on 1st June, 2003, i.e., after the commencement of the assessment year, interest could be levied only from 1st April, 2004, that is, from the A.Y. 2004-05, and no interest u/s 234D could be chargeable prior to the A.Y. 2004-05. Since all the three assessment years are prior to the A.Y. 2004-05, the provisions of section 234D cannot be applied. Accordingly, the Revenue appeals were dismissed.