P.N. PARASHAR, J.M.: ORDER This appeal filed by assessee relating to asst. yr. 1998-99, has been heard by Special Bench in pursuance of order passed by Hon'ble President, under s. 255(3) of IT Act, 1961. 2 . facts and circumstances leading to constitution of Special Bench are as under : 2 . 1 assessee, namely, M/s Aquarius Travels (P) Ltd. filed appeal against order of learned CIT(A) dt. 12th Nov., 2001 for asst. yr. 1998-99 to challenge sustenance of disallowance of expenses relating to interest paid to tune of Rs. 12,94,978. learned Members of Division Bench, hearing appeal, were of opinion that it is fit and proper case which may be heard by Special Bench of Tribunal. For this purpose, they have narrated relevant facts to indicate that one of issues involved requires examination of ambit and scope of s. 14A for deciding allowability of interest. These facts are given in paras 1 and 2 of order of Division Bench in its order dt. 7th Dec., 2006 and are as under : "1. assessee derives income from business of sub-letting of properties. In addition, it also received income from interest and dividend. assessee received interest income of Rs. 6,79,678 on inter-corporate deposits and received dividend of Rs. 3,06,630 from subsidiary company. dividend related to financial year 1995-96 but was declared and received on 9th May, 1997 i.e. during this assessment year. assessee had declared entire income from sub-letting, interest and dividend as business income. assessee paid interest of Rs. 20,34,339 on borrowings made, which has been claimed as deduction. perusal of balance sheet shows that in beginning of year i.e. on 1st April, 1997, share capital and reserves were to tune of Rs. 22.60 lacs and loans taken amounted to Rs. 1.45 crores. As against that, investments were : Rs. 16.42 lacs in fixed assets; Rs. 88.82 lacs in shares and Rs. 99. 53 lacs in loans and advances. These figures clearly show that substantial borrowings were utilized for investment in shares as own funds were only to tune of Rs. 22.60 lacs out of which investments in fixed assets alone were Rs. 16.42 lacs. AO held that sub-letting was only business of assessee and for this business, borrowings were not required. He assessed interest and dividend income as income from other sources. As t h e dividend related to financial year 1995-96, AO held that interest on borrowing utilized for investment in shares had no nexus with income from dividend. He allowed deduction of interest proportionate to borrowings invested in inter-corporate deposits, which had earned interest of Rs. 6,79,678. balance interest of Rs. 12,94,978 (20,34,339 ' 6,79,678) was disallowed as not incurred for purpose of business. In appeal, CIT(A) confirmed order of AO against which assessee is in appeal before Tribunal. 2. assessee has challenged disallowance of interest. assessee has firstly argued that assessee during year had earned dividend from investment in shares which had been offered for tax. There is no interest free advance given to any person. borrowings had thus not been utilized for any tax-free income and therefore there is no case of disallowance of interest. other argument is that even if dividend income was exempt, assessee had composite activity of sub-letting, inter-corporate deposits and investments in shares and therefore, interest on borrowings utilized for composite business activities has to be allowed even if some of activities do not yield any taxable income. Reliance has been placed on judgments of Hon'ble Supreme Court in case of CIT vs. Indian Bank Ltd. (1965) 56 ITR 77 (SC) and in case of Rajasthan State Warehousing Corporation vs. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC). attention of learned Authorised Representative was drawn to s. 14A which was inserted by Finance Act, 2001 with retrospective effect from 1st April, 1962 as per which any expenditure incurred by assessee in relation to income which does not form part of total income, is not allowable. In view of this provision, judgments of Hon'ble Supreme Court mentioned earlier which were delivered prior to insertion of s. 14A were not applicable. Thus, even if income from investments is accepted as business income, expenses relating to investment in shares is exempt from tax. After record date for dividend in May 1997, investment in shares is not going to yield any taxable income as dividend income is exempt from tax w.e.f. 1st June, 1997. Therefore interest payable on such borrowings for period 1st June, 1997 to 31st March, 1998 is not allowable in view of s. 14A. I n fact, before CIT(A) assessee had made alternate submission that disallowance of interest if any could only be made for period 1st June, 1997 to 31st March, 1998." 2.2 After considering these facts, relevant provision of IT Act and orders of different Benches of Tribunal on issue, Division Bench forwarded record of appeal to Hon'ble President for constituting Special Bench. relevant findings of Division Bench in this regard are as under : "Thus, there is difference of opinion between different Benches regarding applicability of proviso to s. 14A to proceedings pending in appeal. We, therefore, consider it appropriate to request Hon'ble President to constitute Special Bench to decide following issue : 'Whether proviso to s. 14A will apply to assessment of earlier years i.e. asst. yr. 2001-02 and preceding assessment years which are pending in appeal and appellate authorities are not empowered to confirm any disallowance of expenses relating to exempted income under s. 14A ?' We have also come across some related issues on which there is difference of opinion between different Benches. issues are mentioned below : (i) Whether CIT is empowered to take action under s. 263 in matter of disallowance of expenses under s. 14A for asst. yr. 2001-02 and earlier years ? (ii) Where in case no disallowance of expenses in relation to exempted income has been made by AO under s. 14A, CIT(A) has power to make enhancement during appellate proceeding pending before him in relation to said expenses ?" 2.3 However, while constituting Special Bench Hon'ble President directed Special Bench to decide following questions and also to dispose of entire appeal : "1. Whether on facts and in circumstances of case provision of s. 14A can be invoked in appellate proceedings ? 2. Whether on facts and circumstances of case decisions of Tribunal in case of Navin Bharat Industries Ltd. vs. Dy. CIT (ITA No. 2201/Bom/1994 for asst. yr. 1990-91) [reported at (2005) 92 TTJ (Mumbai)(TM) 1166'Ed.] and decision in case of Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/2004) are applicable or distinguishable ?" 2.4 At time of hearing of appeal, another applicant namely, Credit Agricole Indosuez who filed ITA No. 6400/Mum/2003 for asst. yr. 1997-98 in Tribunal Mumbai, moved application to intervene in matter. application was allowed vide order dt. 13th March, 2007. However, it was made clear that intervener shall advance argument in support of arguments of appellant on main issue and on facts of case of appellant only. 2.5 Thereafter, vide application dt. 23rd March, 2007 appellant made request for considering and deciding another question which is as under : "Whether considering provisions and objectives of proviso to s. 14A, can any disallowance be made by invoking provisions of s. 14A for any assessment year beginning on or before 1st day of April, 2001, by : (a) Hon'ble Tribunal in appeal pending before it; or (b) learned CIT(A) in appeal pending before such authority; when in either of aforementioned cases it has not been invoked during assessment proceedings ?" 2.6 Vide order dt. 11th April, 2007 it was directed that question raised by applicant being of general nature shall be treated as question No. 1 and questions already referred to Special Bench shall be treated to be question Nos. 2 and 3. Thus following three questions are to be examined and adjudicated by this Bench : "1. Whether considering provisions and objectives of proviso to s. 14A, can any disallowance be made by invoking provisions of s. 14A for any assessment year beginning on or before 1st day of April, 2001, by : (a) Tribunal in appeal pending before it; or (b) CIT(A) in appeal pending before such authority; when in either of aforementioned cases it has not been invoked during assessment proceedings ? 2. Whether on facts and in circumstances of case provision of s. 14A can be invoked in appellate proceedings ? 3. Whether on facts and circumstances of case decisions of Tribunal in case of Navin Bharat Industries Ltd. vs. Dy. CIT (ITA No. 2201/Bom/1994 for asst. yr. 1990-91) [reported at (2005) 92 TTJ (Mumbai)(TM) 1166'Ed.] and decision in case of Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/2004) are applicable or distinguishable ?" 3 . Before considering controversy and before taking up specific issues involved in questions, as referred to above, we deem it proper to narrate entire relevant facts relating to matter in brief. These facts are as under. 3 . 1 assessee company was engaged in business of acquiring movable and immovable properties and leasing them on rent. It also received service charges for maintenance of properties. assessee had debited sum o f Rs. 20,34,339 in P&L a/c under head "Interest". This included bank interest and interest paid to others. assessee company had total fund of Rs. 1,46,42,880 as on 31st March, 1998 which included loan of Rs. 1.15 crores, out of which sum of Rs. 98,39,135 was invested in share capital with its associate concern, namely, M/s United Leasing & Industries Ltd. AO found that borrowed funds were invested in share capital of its sister/subsidiary companies by assessee. He, therefore, required assessee to explain how interest of Rs. 19,74,656 paid to others was incidental to business of company and to prove nexus that it was wholly and exclusively laid out for business purpose of assessee company. contention of assessee w s that it was deriving income from sub-letting of properties, interest on advance and dividends on shares and that income from these sources had always been assessed under head "Income from business and profession". It was explained that income from dividend and interest was part of its business activity. It was submitted that in assessment year under consideration company had shown dividend income of Rs. 3,06,630 which amount was duly offered for taxation during year. It was further pointed out that no dividend has been claimed as exempt under s. 10(33) of Act during assessment year under consideration. Thus, claim of assessee was that since all activities relating to earning of income were undertaken simultaneously and there was intermixing of funds, any part of borrowed funds cannot be linked or identified with any particular activity, hence entire interest was allowable as business expenditure. It was specifically pleaded that even if income from dividend was taken to be exempt during year under consideration, since loan had been borrowed for business purposes, conditions set out in s. 36(1)(iii) of IT Act are satisfied and therefore interest is allowable. 3.2 AO, after considering relevant material came to conclusion that business activity of assessee was sub-letting of properties and interest expenses were not laid out for this activity. He applied provisions of ss. 56 and 57 of IT Act and disallowed interest to tune of Rs. 12,94,978. income was computed by him accordingly. relevant portion of assessment order in this regard is as under : "5. in view of above discussion, it is held that business activity of assessee was sub-letting of properties and interest expenses were not laid out for this activity of business. interest income was generated from funds deposited with its sister/subsidiary companies and it was not business activity of assessee. chargeability of interest income comes within purview of s. 56 of IT Act and expenses to be allowed on this income falls under provision of s. 57 of Act. For allowing expenses under s. 57 falls under provision of s. 57 of Act. For allowing expenses under s. 57 there should be direct nexus between income and expenses. interest paid to others could be at most said to have direct link with interest income of Rs. 6,79,678 declared by assessee company. Therefore, expenses are allowed to extent of interest income available. balance expenses of Rs. 12,94,978 is disallowed being not incidental to earning of interest income. Though in year under consideration, dividend income has been shown at Rs. 3,06,630. But same relates to earlier year and has only been declared during year. So, there is no nexus between declared dividend income and interest expenses incurred by company. Moreover, dividend income is exempt under s. 10(33) of IT Act. As dividend income was from earlier year same was not claimed exempt under s. 10(33) of IT Act by assessee. Accordingly, while considering allowability of interest expenses, no weightage could be given to dividend income declared in this year. With these remarks, total income is computed as under : 6. Income processed under s. 143(1)(a) of IT 12,54,140 Act Add : Interest expenses allowed as discussed 12,94,978 Total income : 25,49,118 Rounded off 25,49,120" 3 . 3 In appeal, assessee challenged findings of AO. It was maintained before learned CIT(A) that even if interest was to be disallowed, then same would be disallowed only after 1st June, 1997 i.e. when dividend income became exempt under s. 10(33) and interest pertaining to period upto 31st May, 1997 should be allowed. It was thus prayed that AO should be directed to allow interest of Rs. 12,94,978. In support of its submission, assessee placed reliance on decision in case of CIT vs. Indian Bank Ltd. (1965) 56 ITR 77 (SC) and decision in case of Rajasthan State Warehousing Corporation vs. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC). learned CIT(A), however, rejected pleas taken before him and upheld order of AO by observing as under : "8. It will be clear from above reproduction that for purpose of business appellant company is investing only idle funds which are required for main objects at S. Nos. 1 to 5 in shares and deposits. appellant is accordingly not making any borrowings of taking any deposits for purpose of earning income from interest or dividends. interest/dividends earned by company on her surplus funds would be taxable under head other sources. AO has already allowed interest to extent of interest income earned by appellant under head other sources. As remaining interest was on borrowings which were not wholly and exclusively for purpose of business same would not be allowable. order of AO holding dividends to pertain to preceding year and disallowance of interest of Rs. 12,94,478 is upheld." 3.4 assessee thereafter challenged order of learned CIT(A) before Tribunal by taking following grounds : "1. That on facts and in circumstances of case and under provisions of law, lower authorities have erred in disallowing interest to tune of Rs. 12,94,978. 2. That your petitioner reserves right to assail assessment on any additional ground which may be advanced at time of hearing of appeal." 4. In setting of above factual background, we proceed to consider general issues involved in questions referred to Special Bench. 5. Shri R.M. Mehta, advocate, appeared on behalf of appellant whereas Shri P.F. Kaka, advocate appeared for intervener, namely, Credit Agricultural Indo Swiss. Shri Rajnish Kumar, CIT-Departmental Representative and Shri K.C. Jain, CIT-Departmental Representative have represented Revenue before Special Bench. All parties have filed written submissions and case laws besides submitting oral arguments in relation to questions referred. 6. learned counsel for assessee Shri Mehta, at outset, pointed out that in this matter Department has not filed any cross-objection nor made any request orally or in writing for invoking s. 14A and in absence of any request from any party, Tribunal cannot, suo motu, invoke provisions of s. 14A. learned counsel thereafter took up issue relating to burden to prove. According to him, generally person who alleges something, has to prove it. Proceeding further, he submitted that if assessee claims any deduction then burden shall be upon him and if Department wants to disallow deduction on any specific ground or under any special provision of law, then burden to prove shall rest on Revenue. Thus, it was canvassed by him that if Department wants to invoke s. 14A, then onus will shift to Department to prove that expenditure incurred by assessee related to exempt income. It was contended by him that it is to be determined as to at what stage assessee is required to prove genuineness or justifiability of expenditure and at which stage burden will shift to Department. 6.1 next submission of learned counsel for assessee was that at stage of assessment or at stage of appellate proceedings neither AO nor learned CIT(A) ascertained facts and material relating to disallowability of expenditure under s. 14A and if Tribunal invokes provisions contained under s. 14A to disallow expenditure then consequence will be that matter will have to be restored to AO who will be allowed to reopen whole thing for adjudication of issue which power is not given to AO because of restriction imposed under proviso to s. 14A introduced w.e.f. 11th May, 2001. contention of learned counsel, therefore, was that firstly Tribunal cannot invoke provisions under s. 14A in absence of any request from any party. Secondly Tribunal cannot disallow expenditure in view of provisions contained under s. 14A because relevant material has not been collected and produced on record by Revenue. Thirdly, in case Tribunal does so and restores matter to AO for collecting material, then Tribunal will be permitting AO to do act, which would not be within his powers; and fourthly, while doing so, Tribunal will be enhancing liability of assessee. It was also submitted that since issue relating to disallowability of interest does not arise out of order of AO or that of learned CIT(A), it would amount transgression of power by Tribunal. In support of his submission, learned counsel placed reliance on ratio of decisions reported in Karnataka State Forest Industries Corpn. Ltd. vs. CIT (1993) 201 ITR 674 (Kar); R.L. Rajgharia vs. ITO (1977) 107 ITR 347 (Cal); CIT vs. Samsul Huda (1995) 216 ITR 712 (Gau); CIT vs. Manick Sons (1969) 74 ITR 1 (SC) and J.B. Greaves vs. CIT (1963) 49 ITR 107 (Bom). 6.2 learned counsel also pointed out that, it is not within power of Tribunal to raise any ground suo motu which would work adversely to assessee and which makes position of assessee worse than it was before filing of appeal. In support of this argument, learned counsel placed reliance on ratio of decisions reported in Kanpur Industrial Works vs. CIT (1966) 59 ITR 407 (All); and CIT vs. Anand Prasad & Ors. (1981) 128 ITR 388 (Del). 6.3 On facts of present case, it was explained by him that AO did not take up issue relating to disallowance under s. 14A and that when assessment order was passed by him, s. 14A was not on statute. Regarding appellate proceedings before learned CIT(A), it was pointed out by him that statutory provisions contained under s. 14A came on statute but learned CIT(A) has not made disallowance under s. 14A by taking recourse to it. He further pointed out that even before Tribunal Department did not raise issue before Division Bench. He also submitted that Department did not raise any additional plea before Tribunal and even if it desired to do so, additional ground could have been raised only relating to question of law and that too when entire material for adjudication of such question was available on record. After making reference to r. 11 of Tribunal Rules, his submission was that additional ground has to relate to subject matter of appeal and since in instant case neither any additional ground was raised nor could have been raised, it is not within scope and powers of Tribunal to raise such ground suo motu. 6 . 4 On issue regarding finality of assessment proceedings, his submission was that assessment has to be considered in its context and thus power of Tribunal is not to raise those issues which were not taken before learned CIT(A). For supporting these submissions he placed reliance on decision reported in CIT vs. Late Begum Noor Banu Alladin (1993) 115 CTR (AP)(FB) 448 : (1993) 204 ITR 166 (AP)(FB). 6.5 On scope and power of Tribunal, he also contented that word "thereon", appearing in s. 254 of IT Act, confers limited powers on Tribunal and Tribunal cannot give direction when there is no cross-appeal by other party, as is case here. 6.6 Coming to issue of disallowance of interest under s. 36(1)(iii) of IT Act, which issue was raised before Tribunal, his contention was that for allowing or disallowing interest under s. 36 of IT Act, it is to be seen that interest was incurred for business purposes and for commercial expediency or not, but so far as s. 14A is concerned, Department is required to prove that expenditure was incurred which related to earning of exempt income i.e. borrowed funds were used for earning of tax-free income. He also pointed out that in return, assessee did not claim any income to be exempt and whatever dividend income was earned by assessee, same was offered for taxation. 6.7 Dealing with scope of proviso, it was submitted by learned counsel for assessee that no assessment could be reopened relating to assessment prior to 1st April, 2001 i.e. prior to asst. yr. 2001-02. It was also contended by him that AO cannot reopen assessment of any earlier year only for invoking provisions under s. 14A. Thus, according to him, reassessment for purpose of s. 14A is not allowed and AO is debarred in reopening assessment of any year prior to asst. yr. 2001-02. According to him, embargo is absolute. 6.8 Coming to continuity of proceedings it was submitted by learned counsel that proviso to s. 14A which was introduced by Finance Act, 2002 w.e.f. 11th May, 2001 provides that while completing assessment relating to assessment year prior to asst. yr. 2001-02, if s. 14A was not invoked by AO, then same cannot be done by CIT(A) or by Tribunal. learned counsel supported these arguments by making reference to following decisions : (1) Navin Bharat Industries Ltd. vs. Dy. CIT (ITA No. 2201/Bom/1994; asst. yr. 1990-91) [reported at (2005) 92 TTJ (Mumbai)(TM) 1166'Ed.]; (2) Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/2004 for asst. yr. 1999-2000); (3) Paul John, Delicious Cashew Co. vs. ITO (2005) 98 TTJ (Coch) 440; (4) Escorts Finance Ltd. vs. Dy. CIT (ITA No. 611/Del/2005 dt. 31st Aug., 2005). 6.9 He also distinguished decision of Delhi Bench of Tribunal in case of Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/04) (supra) by pointing out that in that case when assessment order was passed on 13th March, 2002, provisions of s. 14A very much existed at that time but AO had ignored same. Therefore, learned CIT treated order of AO as erroneous and prejudicial to interest of Revenue whereas in present case at time of making assessment, proviso to s. 14A was not there on statute. 6.10 He also pointed out that there is only one judgment in favour of Revenue i.e. in case of Hexa Securities & Finance Co. Ltd. (supra) against three judgments of Tribunal which are in favour of assessee. learned counsel also made reference to various other authorities to show that legislative intent was to adopt liberal construction so far as beneficial provisions are concerned. By making reference to decision reported in Virtual Soft Systems Ltd. vs. CIT (2007) 207 CTR (SC) 733 : (2007) 289 ITR 83 (SC) (at p. 100) it was pointed out by him that predominant view should be preferred and followed. 6.11 It was finally pointed out by learned counsel Shri Mehta that assessee was not having any tax-free income in this assessment year and therefore there was no question for making disallowance under s. 14A. He also pointed out that no allegation was made by AO that interest has to be paid for earning tax-free income nor any income was treated as exempt by him. For this purpose learned counsel for assessee went through assessment order and order of learned CIT(A) to demonstrate that in spite of observations made by AO and learned CIT(A) no disallowance was made under s. 14A nor any query was raised in relation thereto. According to h i m , under these circumstances, how at subsequent stage i.e. at appellate stage such disallowance can be made by Tribunal by invoking provisions of s. 14A for first time. In this regard and on scope and powers of Tribunal learned counsel made reference to cases including following authorities : (a) Orissa Weavers Co-operative Spinning Mills Ltd. vs. CIT (1991) 187 ITR 646 (Ori); (b) CIT vs. Princess Sarla Kumari & Anr. (1988) 67 CTR (MP) 19 : (1988) 171 ITR 14 (MP); (c) CIT vs. Nanalal Tribhovandas & Anr. (1975) 100 ITR 734 (Guj); (d) CIT vs. Steel Cast Corporation (1977) 107 ITR 683 (Guj); (e) Ugar Sugar Works Ltd. vs. CIT (1982) 27 CTR (Bom) 174 : (1983) 141 ITR 326 (Bom). 7 . intervener filed written submissions. Shri P.F. Kaka, learned counsel, appearing on behalf of intervener, supported arguments of learned counsel for assessee by making detailed submissions. He made reference to amendment introduced in s. 14A of IT Act and proviso attached to s. 14A w.e.f. 11th May, 2001. Further, for tracing out history relating to allowability of interest and expenditure and to explain legal position, in relation thereto, he referred following decisions : (1) CIT vs. Indian Bank Ltd. (supra); (2) CIT vs. Industrial Investment Trust Co. Ltd. (1968) 67 ITR 436 (Bom); (3) CIT vs. Maharashtra Sugar Mills Ltd. 1973 CTR (SC) 489 : (1971) 82 ITR 452 (SC); and (4) Rajasthan State Warehousing Corporation vs. CIT (supra). 7 . 1 contention of learned counsel for intervener was that assessee's income was not tax-free nor assessee claimed any exemption from tax and therefore assessee was not required to meet test of s. 14A. It was submitted by learned counsel that Tribunal cannot undertake exercise when no claim is made by either of parties nor any material is available on record. It was contended by him that proviso is to be interpreted in reasonable manner so as to make it workable. It was also submitted by him that when provision of s. 14A came on statute, it laid heavy onus on Revenue'(a) to invoke provision of s. 14A; and (b) to satisfy requirement of s. 14A. It was further submitted by him that legislature after realizing this difficulty and for making task of Revenue easier, introduced another amendment w.e.f. 1st April, 2007 to lay down guidelines but no such guidelines have been issued. learned counsel thereafter made reference to circular of CBDT dt. 23rd July, 2001 and submitted that circular says that anything done before cut-off date should not be undone and therefore circular is in tune with proviso. In this regard learned counsel also gave example by stating that in case where AO did not invoke s. 14A there may be two situations'(1) where assessee does not file appeal to challenge addition relating to disallowance of expenditure; (2) where assessee challenges disallowance of interest. According to him, in case of assessee, who challenges order of AO and CIT(A) invokes and applies s. 14A then such assessee will be in worse position because in case of assessee who has not preferred any appeal, by virtue of proviso, AO cannot reopen assessment for invoking provisions of s. 14A. According to learned counsel this will create anomalous situation which will not be in consonance with object of legislature for introducing provisions of s. 14A and proviso to that section. In support of this contention, learned counsel placed reliance on following authorities : (i) ABN Amro Bank NV vs. Jt. CIT (2005) 96 TTJ (Kol)(TM) 1041; (ii) ITO vs. Decca Survey Overseas Ltd. (ITA No. 8489/Bom/1991); (iii) ITO vs. Decca Survey Overseas Ltd. (ITA No. 3604/Bom/1994); (iv) Chohung Bank vs. Dy. Director of IT (ITA No. 4948/Mum/2005) [reported at (2006) 104 TTJ (Mumbai) 612'Ed.]; (v) Naveen Bharat Industries Ltd. vs. Dy. CIT (supra). 7.2 He also made reference to provisions contained under s. 43B and submitted that initially provision contained under s. 43B was found to be harassing provision and therefore subsequently provision was introduced with prospective effect to mitigate hardship and to remedy hard effects of s. 43B. By making reference to relevant provisions, he submitted that only reasonable interpretation of proviso is to make it workable and in tune with object of legislature. According to him in case question No. 1 is decided against assessee then consequence will be that although AO does not have power to disturb assessment for asst. yr. 2001-02 and earlier assessment years but appellate authorities will be doing so and under orders of such appellate authorities, including Tribunal, while giving effect to their orders, AO will be doing same thing and thus effect of proviso shall be nullified. This, according to him, will result in unintended consequences. According to him, correct interpretation of proviso will be that assessment relating to period prior to 1st April, 2001 should remain undisturbed because if AO is not permitted to undo assessments completed prior to 1st April, 2001, then other authorities can also not be permitted to do same. In support of this argument, he placed reliance on decision in case of CIT vs. Gwalior Sugar Co. (P) Ltd. (1988) 68 CTR (MP) 43 : (1988) 174 ITR 1 (MP). learned counsel also pointed out that disallowability of interest under ss. 36 and 37 is different from disallowability of interest under s. 14A of IT Act and Tribunal cannot put onus on assessee to justify expenditure because for disallowing interest or expenditure in relation to exempt income, burden lies upon Department and not upon assessee. He also pointed out that in case Tribunal adopts such course result will be enhancement of income of assessee which cannot be done by Tribunal and consequently for applying s. 14A on facts and circumstances of case since there is no material, Tribunal will be completely handicapped to decide matter and shall be compelled to remand matter to AO to consider again this issue which course is not permissible. Thus, his submission was that Tribunal cannot course is not permissible. Thus, his submission was that Tribunal cannot confer power on AO which is not available to him under statute in view of proviso which is very specific. For supporting this submission he placed reliance on decisions in cases of V. Uppalaiah vs. Dy. CIT (2005) 95 TTJ (Hyd) 706 : (2005) 94 ITD 178 (Hyd); Narinder Singh Dhingra vs. CIT (1973) 90 ITR 110 (Del); CIT vs. Rafiulla Tea & Industries (P) Ltd. (1999) 154 CTR (Gau) 486 : (1998) 234 ITR 433 (Gau) and CIT vs. Matrix Intel (P) Ltd. (2007) 294 ITR 257 (Mad). Coming to powers of CIT(A) it was contended by him that powers of CIT(A) are coterminous with that of AO and if AO is barred in exercising jurisdiction, CIT(A) cannot exercise same jurisdiction because what AO cannot do, CIT(A) can also not be allowed to do same and since jurisdiction of AO has been taken away by proviso, same effect will be on powers of CIT(A) and even on power of Tribunal. 8. learned CIT'Departmental Representative Shri Rajnish Kumar made very elaborate submissions for meeting out contentions raised by learned counsel for assessee and by learned counsel for intervener. He also filed written submission dt. 23rd April, 2007. In brief, submission of learned CIT'Departmental Representative, as given in written arguments are as under : 1. stand of Revenue as regards question No. 1 is unequivocal affirmative so far as CIT(A) is concerned. first appellate authority has well defined powers to resort to enhancement of tax liability of appellant before him. In respect of issue under consideration of Bench i.e. applicability of provisions of s. 14A of Act, powers of CIT(A) in this sphere would be circumscribed by restriction put on AO by virtue of insertion of proviso by Finance Act, 2002 with retrospective date 11th May, 2001. 1.1 However, where assessment order passed prior to 11th May, 2001 is under challenge before CIT(A) having any claim of expenditure, being subject matter of dispute, he would be duty bound to examine effect of s. 14A while deciding deductibility or otherwise of such expenditure. In case where appeal is on some other point not involving any expenditure but record shows that appellant has certain income which do not form part of total income and entire claim of expenditure stands allowed, CIT(A) would be under obligation to examine record from view point of retrospective insertion of s. 14A. 1.2 Likewise, CIT(A) would be duty bound to action some way, in respect of appeals relating to asst. yr. 2001-02 and earlier years, where assessment orders were made after 11th May, 2001 without recourse to s. 14A of Act. 2. So far as Tribunal is concerned, it would be within its powers to invoke provisions of s. 14A, provided issue of deductibility of expenditure, which also includes claim of expenditure relating to earning of exempted income which does not form part of total income, is subject matter of appeal before it. 3. That if law is amended so as to make it applicable retrospectively to any assessment year, question at issue in respect of that year will have to be decided in light of law as amended and it shall be so even if matter is at appellate, revision or reference stage. In support of this contention, reliance is placed by learned CIT'Departmental Representative on following authorities : (i) CST vs. Bijli Cotton Mills AIR 1965 SC 1594; (ii) CIT vs. Ashish Ratilal Shah/Mrs. Kamla S. Asrani (1991) 93 CTR (Bom) 36 : (1991) 189 ITR 359 (Bom); (iii) CIT vs. May & Baker (India) (P) Ltd. (1991) 95 CTR (Bom) 168 : (1991) 192 ITR 239 (Bom); (iv) CIT vs. Dewan Bahadur Ramgopal Mills Ltd. (1961) 41 ITR 280 (SC); (v) CIT vs. Smt. Eva Raha (1979) 12 CTR (Gau) 333 : (1980) 121 ITR 293 (Gau); (vi) National Agricultural Co-operative Marketing Federation of India Ltd. vs. Union of India & Ors. (2003) 181 CTR (SC) 1 : (2003) 260 ITR 548 (SC); (vii) J.M. Bhatia, AAC vs. J.M. Shah (1985) 49 CTR (SC) 382 : (1985) 156 ITR 474 (SC); (viii) CIT vs. Devidayal Stainless Steel India (P) Ltd. (1991) 94 CTR (Bom) 82 : (1991) 189 ITR 506 (Bom); (ix) CIT vs. Shah Electrical Corpn. (1993) 114 CTR (Guj) 75 : (1994) 207 ITR 350 (Guj); and (x) Asstt. CIT vs. Shakti Builders (2005) 93 TTJ (Del) 425 : (2005) 93 ITD 269 (Del). 4. Regarding scope of s. 14A, submission of learned CIT'Departmental Representative was that proviso to s. 14A was inserted w.e.f. 11th May, 2001 on which date retrospective section came on statute book. proviso takes away power of AO in respect of any assessment y e r before 1st April, 2001, under various specific circumstances. These circumstances have been elaborated in written submissions of Department. 5. powers of Tribunal are to dispose of any appeal before it. In such case if subject matter of appeal relates to claim of deductibility of expenditure, whether it is assessee's or Revenue's appeal even provisions of s. 14A are to be taken into account. For explaining meaning of subject matter of appeal, learned CIT'Departmental Representative placed reliance on following authorities : (a) Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC); (b) CIT vs. Mahalaxmi Textile Mills Ltd. (1967) 66 ITR 710 (SC); (c) CIT vs. P.B. Corporation (2004) 187 CTR (Guj) 212 : (2004) 266 ITR 548 (Guj). learned CIT'Departmental Representative also placed reliance on following decisions on this point : (i) B.R. Bamasi vs. CIT (1972) 83 ITR 223 (Bom); (ii) CIT vs. Gilbert & Barkar Manufacturing Co. 1977 CTR (Bom) 347 : (1978) 111 ITR 529 (Bom); (iii) CIT vs. Edward Keventer (Succesors) (P) Ltd. (1980) 123 ITR 200 (Del); (iv) Marolia & Sons vs. CIT (1979) 8 CTR (All) 170 : (1981) 129 ITR 475 (All); (v) N.P. Saraswathi Ammal vs. CIT (1982) 138 ITR 19 (Mad); (vi) CIT vs. Om Prakash Bidhi Chand (1982) 27 CTR (P&H) 6 : (1983) 141 ITR 750 (P&H); (vii) Malayalam Plantations (India) Ltd. vs. CIT (1990) 184 ITR 505 (Ker); (viii) Travancore Chemical & Manufacturing Co. Ltd. vs. CIT (1997) 137 CTR (Ker) 115 : (1997) 226 ITR 429 (Ker); (ix) CIT vs. Smt. S. Vijayalakshmi (2000) 162 CTR (Mad) 569 : (2000) 242 ITR 46 (Mad); and (x) Shahid Atiq vs. ITO (2005) 98 TTJ (Del) 971 : (2005) 97 ITD 22 (Del). 6. For controverting argument of learned counsel for assessee that by exercising its powers Tribunal cannot put assessee in adverse position, learned Departmental Representative placed reliance on following authorities : (a) C.C.A.P. Ltd. vs. CIT (2005) 193 CTR (Cal) 74 : (2004) 270 ITR 248 (Cal); (b) Jt. CIT vs. Sakura Bank Ltd. (2006) 99 TTJ (Mumbai) 689 : (2006) 100 ITD 215 (Mumbai). 7. learned CIT'Departmental Representative also submitted that in instant case assessment proceedings did not become final because appeal was pending when s. 14A came into effect and since appeal is in continuation of assessment proceedings relevant amended provisions have to be given effect while deciding appeal. 8. learned Departmental Representative also submitted that authorities on which reliance has been placed by learned counsel for assessee are totally distinguishable on facts of present matter. In this regard, in particular, he made reference to decision in case of Maruti Udyog Ltd. vs. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 ITD 119 (Del). He also submitted that decision in case of Navin Bharat Industries Ltd. vs. Dy. CIT (supra) is also distinguishable because in that case issue was regarding claim of expenses in relation to business covered under s. 10A. Thereafter, learned Departmental Representative placed reliance on decision of Delhi Bench of Tribunal in case of Hexa Securities Ltd., (supra) in addition to above authorities, for supporting argument that proviso to s. 14A cannot curtail powers of CIT(A) and Tribunal and also on scope of s. 14A, he placed reliance on following authorities : (a) CIT vs. Rajendra Prasad Moody 1978 CTR (SC) 141 : (1978) 115 ITR 519 (SC); (b) Asstt. CIT vs. Citicorp Finance (India) Ltd. (2007) 111 TTJ (Mumbai) 82 : (2007) 12 SOT 248 (Mumbai). In paper book, filed with written submissions, learned CIT'Departmental Representative has also filed copies of various decisions reference to which was made by him during course of arguments before us. 9 . We have carefully considered entire material on record, arguments raised on behalf of assessee, on behalf of intervener and on behalf of Department. Before proceeding to deal with questions referred to Special Bench, we would consider it proper to deal with scope of amendment introduced in s. 14A, scope of proviso to that section inserted w.e.f. 11th May, 2001 and scope of other relevant provisions, instructions of CBDT and relevant case law relating to these provisions, because controversy involved in various questions, referred to Special Bench, centers around scope of these provisions. 10. Sec. 14A inserted in Chapter IV under caption "Computation of total income" is as under : "14A(1) For purpose of computing total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act." 10.1 proviso to this section reads as under : "Provided that nothing contained in this section shall empower AO either to reassess under s. 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under s. 154, for any assessment year beginning on or before 1st day of April, 2001." 10.2 Sub-ss. (2) and (3) were further added to s. 14A by Finance Act, 2006 w.e.f. 1st April, 2007. These sub-sections are as under : "(2) AO shall determine amount of expenditure incurred in relation t o such income which does not form part of total income under this Act in accordance with such method as may be prescribed, if AO, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. (3) provisions of sub-s. (2) shall also apply in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under this Act." 10.3 After insertion of proviso, Board issued Circular No. 11 of 2001 dt. 23rd July, 2001 [(2001) 169 CTR (St) 1], to explain ambit and scope of proviso. This circular is as under : "To All CCITs. All DGITs. Subject : Restriction on reopening of completed assessments on account of provisions of s. 14A'Clarification regarding. Sir, Finance Act, 2001, has inserted s. 14A in IT Act, 1961, wherein it was specifically provided that no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under Act. amendment takes effect from 1st April, 1962. Sec. 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 introduction of said provisions, expenditure incurred to earn exempt income was allowable. Instances of reopening of old assessments, which had attained finality, after insertion of s. 14A in Act, have come to notice of Board. Reopening of past completed assessments, having attained finality, on basis of newly inserted provisions of s. 14A is likely to cause hardship to large number of taxpayers and would result in increasing avoidable litigation. Board has considered this matter and hereby directs that assessments where proceedings have become final before 1st day of April, 2001 should not be reopened under s. 147 of Act to disallow expenditure incurred to earn exempt income by applying provisions of newly inserted s. 14A of Act. This may be brought to notice of all officers in your region immediately. Yours faithfully, (Sd.) Rahul Navin, Under Secretary (TPL-I) (F.No. 1 53 /114/2001-TPL)" 10.4 Vide Circular No. 8 of 2002 dt. 27th Aug., 2002 [(2002) 178 CTR (St) 9], Board further clarified scope of amendment of s. 14A. relevant portion of circular is as under : "23.1 Through Finance Act, 2001, new section namely s. 14A was inserted in IT Act retrospectively w.e.f. 1st April, 1962 to clarify intention of legislature that no deduction shall be allowed in respect of any expenditure incurred by assessee in relation to income which does not form part of total income under IT Act. intention of inserting new section retrospectively was to set existing controversy on this issue at rest and not to unsettle cases by raising issue afresh. 23.2 Through Finance Act, 2002, proviso to s. 14A has been inserted so as to clarify that AO shall not reassess cases under s. 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under s. 154, for any assessment year beginning on or before 1st day of April, 2001." 1 1 . Now, we proceed to consider submissions of learned representatives of parties made before us. 12. submission of learned counsel for assessee and that of learned counsel for intervener was that in view of proviso, no assessment could be reopened relating to assessment prior to asst. yr. 2001-02. According to them, this embargo is absolute. It was further contended by learned counsel for assessee that if while completing assessment relating to asst. yr. 2001-02 or earlier years, provision of s. 14A was not invoked by AO, then same cannot be invoked by learned CIT(A) or by Tribunal because if AO is debarred in taking certain action or is deprived of power in relation to certain process, then CIT(A) or Tribunal cannot enable him to do so directly or indirectly. For supporting this contention, learned counsel for assessee placed heavy reliance on decision in case of Paul John, Delicious Cashew Co. vs. ITO (supra) and on decision in case of Escorts Finance Ltd. vs. Dy. CIT rendered in ITA No. 611/Del/2005, dt. 31st Aug., 2005. 12.1 submission of learned counsel for intervener on scope of s. 14A and proviso attached thereto was that after feeling difficulty which arose on account of retrospective amendment introduced under s. 14A, proviso was introduced to virtually make it prospective so that assessees who had filed returns earlier may not be put to any disadvantageous position. In this regard learned counsel referred to entire legislative history for introducing proviso. It was pointed out by him that proviso was introduced w.e.f. 11th May, 2001, on which date assent of President was obtained for amending s. 14A. learned counsel in this regard made reference to Finance Bill, 2001 and Notes on Clauses of this Bill. According to him, in view of ratio of various decisions of apex Court regarding allowance of deduction for business expenses under s. 36 or 37 aspect of taxability or non-taxability of income was not relevant. Thus in order to do away with impact of decisions of Hon'ble apex Court in case of Indian Bank and Rajasthan Warehousing (supra), proviso was introduced and further sub-ss. (2) and (3) were introduced w.e.f. 1st April, 2007 and now provision contained under s. 14A is to be implemented as per latest amendment introduced by two sub-sections from 1st April, 2007. 13. contention of learned CIT'Departmental Representative on other hand was that scope of proviso is very much limited and it cannot nullify or frustrate object of main provision contained under s. 14A. scope and applicability of retrospective amendment and s. 14A 1 4 . For proper appraisal of above referred arguments of learned representatives of parties we have to examine scope of retrospective and prospective legislation, particularly with reference to s. 14A and proviso attached thereto. 1 4 . 1 We have carefully considered arguments of learned representatives of parties and have also gone through all relevant authorities cited by them in support of their respective contentions. 14.2 scope of applicability of retrospectively amended provision has been elaborated by Hon'ble Supreme Court in case of CIT vs. Straw Products Ltd. (1966) 60 ITR 156 (SC). In that case respondent company had obtained certain concessions and facilities under agreement with Government of Bhopal dt. 30th Sept., 1938. Under agreement respondent was not required to file any return of income under Bhopal IT Act. This period of ten years expired on 31st Oct., 1948. Later on Bhopal State merged in India on 1st Aug., 1949 and ITO computed written down value of assets of assessee as on 1st Jan., 1951, deducting therefrom depreciation actually allowed till 31st Dec., 1950 and accordingly reduced depreciation allowed in original assessment. In appeal, AAC restored depreciation as computed in original assessments. In second appeal, Tribunal upheld order of AAC. Before High Court, under reference, question was as to whether, having regard to provisions of para 2 of Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, and cl. 8 of agreement, correct basis for computing written down value of depreciable assets was one which was adopted by ITO or one adopted by AAC. High Court held that correct basis was one adopted by AAC. Thereafter, on 20th April, 1962 para 2 of Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, was amended and Explanation was inserted. On appeal to Supreme Court, Department relied upon amended provision. Hon'ble Supreme Court held that answer to reference was to be given in accordance with amended law unless question referred by Tribunal was not couched in terms of sufficient amplitude to cover inquiry into question in light of amendment. 14.3 Hon'ble Supreme Court while holding so, placed reliance on its earlier decision in case of CST vs. Bijli Cotton Mills (supra). observations made by Justice Shah J. in that case, which have been quoted by apex Court in its decision in case of Straw Products Ltd. (supra), at p. 163 of report, are as under : "Undoubtedly Tribunal called upon to decide taxing dispute must apply relevant law applicable to particular transaction to which problem relates and that law normally is law applicable as on date on which transaction in dispute has taken place. If law which Tribunal seeks to transaction in dispute has taken place. If law which Tribunal seeks to apply to dispute is amended, so as to make law applicable to transaction in dispute, it would be bound to decide question in light of law so amended. Similarly, when question has been referred to High Court and in meanwhile law has been amended with retrospective operation, it would be duty of High Court to apply law so amended if it applies. By taking notice of law which has been substituted for original provision, High Court is giving effect to legislative intent and does no more than what must be deemed to be necessarily implicit in question referred by Tribunal, provided question is couched in terms of sufficient amplitude to cover enquiry into question in light of amended law, and enquiry does not necessitate investigation of fresh facts. If question is not so couched as to invite High Court to decide question in light of law as amended or if it necessitates investigation of facts which have not been investigated, High Court may refuse to answer question. Application of relevant law to problem raised by reference before High Court is not normally excluded merely because at date when Tribunal decided question relevant law was not or could not be brought to its notice." 14.4 In view of above proposition laid down by Hon'ble Supreme Court, it is clear that amended law has to be given effect even by appellate authorities and Courts, if matter is pending before them. In view of this position, amendment made with retrospective effect under s. 14A of IT Act has to be given effect by CIT(A) and Tribunal if matter is heard by such authorities after amendment has become operative. 14.5 In case of CIT vs. Ashish Ratilal Shah (supra) Hon'ble Bombay High Court has also considered position regarding interpretation of retrospective amendment made in law. It has been observed that when law is amended with retrospective effect, Court when it decides any proceedings, has to apply amended law retrospectively as if it were in force at material time. In that case Court has further observed that under both sub-ss. (1) and (2) of s. 256 of IT Act, High Court has to consider, whether question of law arose from order of Tribunal in appeal and when reference is being decided, High Court has to take into account any retrospective amendment of law which may have taken place after Tribunal's decision and during pendency of reference. 14.6 In case of State of U.P. vs. Modi Industries Ltd. (1977) 40 STC 73 (SC), after decision in reference by High Court and before Tribunal could act upon it, law was amended retrospectively. Tribunal, thereupon, did not act on basis of decision of High Court under reference. assessee moved High Court under Art. 226 and Hon'ble High Court viewed that revising authority was not free to take different view from one expressed by High Court on any ground whatsoever, including any subsequent amendment in law and that it was bound to decide case in conformity with judgment of High Court. On appeal, Hon'ble Supreme Court set aside decision of High Court by holding that retrospective amendment clearly indicated intention of legislature of restoring assessments and orders made earlier and hence Tribunal was entitled to take such retrospective amendment into account. 14.7 In case of CIT vs. May & Baker (India) (P) Ltd. (supra), while answering reference on basis of old law, Hon'ble Bombay High Court cautioned Tribunal to take into account retrospectively amended provision while passing final order in appeal. 14.8 In case of CIT vs. Smt. Eva Raha (supra), Hon'ble Guwahati High Court has observed as under : "Therefore, in instant case, orders which had been rendered by Tribunal, were good and valid when they were so rendered. But orders so rendered are patently invalid and wrong by virtue of retrospective operation of Amendment Act. Therefore, when application for rectification was made within period of limitation prescribed under s. 254(2) of Act as result of retrospective operation of Amendment Act, conclusion is now inescapable that order in question is inconsistent with provision of Amended Act and 'must be deemed to suffer from mistake apparent from record' and that is why applications for rectification ought to have been entertained and disposed of by Tribunal. Tribunal has power under s. 254(2) to rectify mistake." 14.9 issue was also considered by Hon'ble Supreme Court in case of Ujagar Prints vs. Union of India (1989) 75 CTR (Allied Laws) (SC) 1 : (1989) 179 ITR 317 (SC). In that case Hon'ble Supreme Court held that competent legislature can always validate law which has been declared by Courts to be invalid and such valid law can also be made retrospective. 14.10 same view has been expressed in following cases : (i) Asstt. CIT vs. Shakti Builders (supra); (ii) J.M. Bhatia, AAC vs. J.M. Shah (supra); (iii) CIT vs. Devidayal Stainless Steel (supra); and (iv) CIT vs. Shah Electrical Corp. (supra). 14.11 In view of above mentioned authorities, there remains no doubt that s. 14A has to be applied retrospectively by all Courts before whom proceedings are pending i.e., if issue is related to subject matter pertaining to deduction of expenses in relation to exempt income, then such issue has to be decided by taking cognizance of amended law. learned counsel for assessee has not been able to point out any authority to effect that while deciding matter amended law existing at time of pendency of such matter can be ignored. Thus, in our opinion amendment made retrospectively has to be given full effect and has to be applied by all authorities including Tribunal, if facts involve issue warranting application of amended law as contained under s. 14A of IT Act. Scope and ambit of proviso attached to s. 14A 15. settled legal position is that normal functioning of proviso is to except something from enactment or to qualify something enacted thereto but proviso would be within purview of enactment. 15.1 In case of Mullins vs. Treasurer of Survey (1980) 5 QBD 170 at p. 173, learned Lush, J., observed that "when one finds proviso to section natural presumption is that, but for proviso, enactment part of section would have included subject matter of proviso". In words of Lord Macmillan expressed in case of Local Government Board vs. South Stoneham Union (1909) AC 57 p. 62 (HL), proviso may be qualification of preceding enactment, which is expressed in terms too general to be quite accurate. Hon'ble Mr. Justice Hidayatulla has expressed this rule in case of Shah Bhojraj Kuverji Oil Mills & Ginning Factory vs. Subhash Chandra Yograj Sinha AIR 1961 SC 1596 at p. 1690 in following words : "As general rule, proviso is added to enactment to qualify or create top exception to what is in enactment, and ordinarily, proviso is not interpreted as stating general rule." 15.2 In case of CIT vs. Indo Mercantile Bank Ltd. AIR 1959 SC 713, Hon'ble Mr. Justice Kapur, has also made following observations regarding scope of proviso : "The proper function of proviso is that it qualifies generality of main enactment by providing exception and taking out as it were, from main enactment, portion which, but for proviso would fall within main enactment. Ordinarily it is foreign to proper function of proviso to read it as providing something by way of addendum or dealing with subject which is foreign to main enactment." 15.3 It has been laid down by Courts that proviso is not normally construed as nullifying enactment or as taking away completely right conferred by enactment. In case of S. Sundaram Pillai vs. Pattabhiraman (1985) 1 SCC 591, it has been observed by Hon'ble Supreme Court as under : "To sum up proviso may serve four different purposes : (1) Qualifying or excepting certain provisions from main enactment; (2) It may entirely change very concept of intendment of enactment by insisting on certain mandatory conditions to be fulfilled in order to make enactment workable. make enactment workable. (3) It may be so embedded in Act itself as to become integral part of enactment and thus acquire tenor and colour of substantiate enactment itself; and (4) It may be used merely to act as optional addenda to enactment with sole object of explaining real intendment of statutory provision." 15.4 In view of above propositions and rules, we have to give effect to provision and proviso both. In our considered opinion, terminology adopted in provision and in proviso does not lead to any inconsistency because words expressed therein convey plain meaning where language used in proviso is quite clear and no ambiguity is found, it would be futile to go into question whether proviso operates as substantive provision or only by way of exception and hence plain meaning must be adopted. 16. In light of propositions, set out above, we consider scope of proviso to s. 14A which was inserted w.e.f. 11th May, 2001. We have already reproduced relevant proviso and also circular letters of CBDT clarifying position. terminology and language adopted in proviso is very clear. According to settled rule of literal construction, if meaning of any statutory provision is plain and clear, then effect has to be given to terminology used therein. Thus, as per its plain meaning, what proviso protects is pre-existing assessment orders and deprives AO to unsettle same by taking recourse to provisions contained under s. 147 or 154. proviso therefore, excludes jurisdiction of AO to reassess income or to rectify assessment upto asst. yr. 2001-02, so far as s. 14A is concerned. 16.1 contention of learned counsel for assessee that since under proviso, AO has been deprived of making reassessment or in amending assessment already made, CIT(A) and Tribunal can also not d o anything to empower AO to do same act, doing of which is prohibited by proviso, cannot be accepted. language adopted in proviso is very specific. Only reassessment under s. 147 and only amendments/rectification of assessments already made has been debarred. There are several authorities under IT Act who derive their powers from various other statutory provisions. For example, CIT has power under s. 263 to modify or enhance assessment made by AO. Thus, since power of CIT under s. 263 has not been excluded, in our opinion, by adopting logic that if power under s. 263 is exercised in relation to past assessments which have been finalized, effect would be that AO will be redoing whole thing and thus in effect, effect of proviso shall be nullified, cannot be accepted. It was so held in case of Hexa Securities & Finance Co. Ltd. by Tribunal, Delhi Bench 'D' vide its order dt. 30th Nov., 2006 rendered in ITA No. 2308/Del/2000. Similarly, power of CIT(A) and those of Tribunal can also not be curtailed. proviso has to be construed strictly as it has got effect of curtailing ambit and operation of main provision only to limited extent. It cannot nullify whole of provision. Thus, if proviso is given wider effect than intended by legislature, then it would frustrate object of amendment of s. 14A which has been introduced intentionally with retrospective effect by legislature. Harmonious construction of s. 14A and proviso attached to it 17. We have considered scope and ambit of retrospectively amended provisions as contained in s. 14A and have also considered ambit and scope of prospective provision as contained in proviso attached to it. For doing so, we have considered these provisions separately. However, in order to properly construing these two provisions together so as to give required effect to each of provision, harmonious construction of these provisions is necessary for avoiding consequences of rendering one provision totally ineffective at cost of giving effect to other. For this purpose, we have to gather intention of legislature as well as purpose and object behind enactment of main provision i.e. s. 14A and proviso subsequently inserted for partly controlling its effect or delimiting its scope. 17.1 It is commonly known that statute is edict of legislature and conventional way of interpreting or construing statute is to seek intention of its maker. In case of RMD Chamarbaugwala vs. Union of India AIR 1957 SC 628 (at 631), Hon'ble Supreme Court has observed that, "a statute is to be construed according to intent of them that make it and duty of judicature is to act upon true intention of legislature''the mens or sentential legis'. intention of legislature assumes two aspects i.e. in one aspect it carries concept of meaning i.e. what words mean and in another aspect, it conveys concept of purpose and object or reason and spirit prevailing through statute. process of construction, therefore, combines both literal and purposive approaches. In other words, legislative intention i.e. true or legal meaning of enactment is derived by considering meaning of words used in enactment in light of any discernible purpose or object which comprehends mischief and its remedy to which enactment is directed. This rule of construction has been termed as cardinal principle of construction by Hon'ble Supreme Court of India in case of Union of India vs. Elphinstone Spg. & Wvg. Co. Ltd. AIR 2001 SC 724. 17.2 On basis of above rule of construction, we have to see intention of legislature in context of object behind legislating two provisions properly. For this purpose, firstly history of legislature assumes significant role because it is to be seen as to what was mischief requiring to be cured for enacting provision and what was purpose for enacting same. Prior to insertion of s. 14A, only requirement for allowing deduction of expenditure under ss. 36 and 37 of IT Act was to see as to whether expenditure was incurred 'for purpose of business'. Under ss. 56 and 57 of IT Act, requirement was to see as to whether expenses were incurred for earning profits or gains of 'income from other sources'. Even expenditure incurred for income exempted from tax was allowable if these requirements were satisfied. legislature, therefore, wanted to introduce another test i.e. if income itself is not part of total income then expenditure relating thereto should not be allowed. With this object, s. 14A was introduced. As amendment was retrospective, it was apprehended that in view of provision contained under amended law, all concluded matters even prior to introduction of proviso i.e. prior to asst. yr. 2001-02 may be reopened by taking recourse to reassessment proceedings or rectification process. legislature therefore wanted to curb this mischief and with this object and aim, proviso to s. 14A was added. proviso as per its very nature controlled effect of main provision by providing that if assessments for asst. yr. 2001-02 and earlier years were completed and issue stood concluded then same shall not be disturbed. However, restriction imposed by proviso was not absolute. power of AO was curtailed and he was debarred in making reassessment or in amending assessment orders passed for assessment years prior to asst. yr. 2001-02, but if proceedings were continuing in relation to such assessment years and assessments were not concluded then issue was to be decided as per amended provision and proviso could not restrict operation of main provision so as to require forum dealing with matter, not to give effect to amended law or not to take cognizance of same if issue related to subject covered under main provision as contained under s. 14A. real controversy therefore centers around point as to in what manner two provisions should be construed so as to avoid consequence of rendering one provision as redundant or nugatory in giving life and effect to other. In such situation and for resolving such controversies, best rule of construction of statutory provision is to take recourse to harmonious construction, which requires that two provisions should be construed harmoniously so that both can be given effect according to desired legislative intention and also to fulfill object behind their enactment. It has been observed by Courts that statute must be read as whole and one provision of Act should be construed with reference to other provisions of same Act so as to make consistent enactment of whole statute. Such construction has merit of avoiding any inconsistency or repugnancy either within section or between section and other parts of statute. In case of Raj Krushna vs. Binod Kanungo AIR 1954 SC 202, Hon'ble Supreme Court has observed that "it is duty of Courts to avoid 'a head on clash' between two sections of same Act and whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise". 17.3 In case of Dormer vs. Newcastle-on-Tyne Corpn. (1940) 2 All ER 521, it was observed that it should not be lightly assumed that "Parliament has given with one hand what it took away with other". 17.4 As observed by us, while dealing with main provision of s. 14A, 17.4 As observed by us, while dealing with main provision of s. 14A, law was amended retrospectively. intention of legislature in amending law retrospectively is clearly expressed in words used in provision. It is settled law that if intention is manifest by express words or necessary implication, then such intention is to be given effect to. 17.5 It may be pointed out that no authority has been brought to our notice according to which retrospective amendment introduced through s. 14A is invalid or is not aimed at carrying out object behind it. arguments of learned counsel for assessee was that in view of proviso, amendment as introduced in s. 14A will debar all authorities in disturbing assessments of asst. yr. 2001-02 and earlier years through any course in any manner on ground that proviso intends so, cannot be accepted because if such approach is adopted then retrospectivity of amended provision as contained under s. 14A shall be rendered ineffective. 1 8 . Thus, according to principle of harmonious construction as elaborated above and after considering plain meaning of provision and proviso, it is quite clear that both have to be applied in their respective fields. proviso only restrains AO from invoking provisions of ss. 147 and 154. This restriction cannot be stretched too far and has to be confined to area which it covers. That appears to be intention of legislature. If restriction was to be applied to other areas and was to cover other authorities for curtailing their powers, same could have been specifically provided. proviso does not talk of restricting power of CIT(A) or Tribunal. Hence, powers of these authorities are to be exercised as per provisions of IT Act and no restriction can be inferred from proviso. consequence theory as propounded in arguments of learned counsel of assessee and those of intervener also cannot be accepted because then indirectly proviso will affect powers of higher authorities. Under IT Act, powers of AO are well defined. These powers include power of reassessment and rectification. Only these two powers cannot be exercised by AO in relation to completed assessments for asst. yr. 2001-02 and earlier years. However, in relation to such years also if assessments are not completed or concluded, proviso will not come in way and provision as contained in s. 14A, will be given effect because no authority can ignore law prevailing at time when matter is being considered and decided. 1 8 . 1 In instant case, since proceedings are pending before Tribunal, which is to be regarded as continuation of assessment proceedings as held in case of CIT vs. Mayur Foundation (2005) 194 CTR (Guj) 197 : (2005) 274 ITR 562 (Guj), it cannot be said that assessment stands concluded and therefore proviso will bar Tribunal in giving effect to provisions as contained under s. 14A. 19. In view of above, it is clear that proviso imposes restriction on main provision and it clarifies its scope by excluding powers of AO to make reassessment under s. 147 or to rectify assessment under s. 154 of IT Act. It cannot totally nullify main provision. In view of this construction of two provisions i.e., s. 14A and proviso, contention of learned counsel for assessee that operation of main provision stands excluded upto asst. yr. 2001-02, even though made retrospective from 1st April, 1962 cannot be accepted because such interpretation would lead to absurdity as it would not only negate retrospective effect of main provision contained under s. 14A but shall render it totally nugatory. Powers of Tribunal 2 0 . Now we proceed to consider power of Tribunal. In view of provisions contained under s. 254(1), Tribunal may, after giving both parties to appeal opportunity of being heard, pass such orders thereon as it thinks fit. term "thereon" also appears under old s. 33, which provision is as under : "33(4) Appellate Tribunal may, after giving both parties to appeal opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to assessee and to CIT." 20.1 apex Court considered matter in detail and explained entire scope of appeal before Tribunal and its powers in case of Hukumchand Mills Ltd. vs. CIT (supra). Hon'ble Court made following observations : "Civil Appeals Nos. 411 to 413 of 1965 : sole question argued on behalf of assessee in these appeals is that Tribunal was not competent to go into question whether provisions of para 2 of Taxation Laws Orders were applicable to present case and respondent should not have been allowed to raise contention for first time before Tribunal. It was also argued that Tribunal ought not to have remanded case to ITO for ascertaining whether any depreciation was allowed under Industrial Tax Rules and whether such depreciation should be taken into account for purpose of computing written down value. In our opinion there is no justification for this argument. In first place, no objection was raised before Tribunal or before High Court that Department should not have been allowed to raise question for first time with regard to application of para 2 of Taxation Laws Order. We shall, however, assume in favour of assessee that question was implicit in question actually framed and referred to High Court. Even upon that assumption we are of opinion that Tribunal had jurisdiction to permit question to be raised for first time in appeal. powers of Tribunal in dealing with appeals are expressed in s. 33(4) of Act in widest possible terms. Sec. 33(3) of Act states that 'an appeal to Tribunal shall be in prescribed form and shall be verified in prescribed manner ...' Sec. 33(4) reads as follows : '33(4) Appellate Tribunal may, after giving both parties to appeal opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to assessee and to CIT'." 2 0 . 2 In view of above decision, term "thereon" restricts jurisdiction of Tribunal to subject matter of appeal. words, "pass such orders as it thinks fit" include all powers which are conferred on Departmental authorities except power of enhancement. Consequently, Tribunal has authority under this section to direct AAC or ITO to hold further inquiry or to dispose of matter on basis of such inquiry. 20.3 Rules 12, 27 and 28 of Tribunal Rules also deal with power of Tribunal and procedure to be adopted by it. These rules are as under : "12. appellant shall not, except by leave of Tribunal, urge or be heard in support of any ground not set forth in memorandum of appeal, but Tribunal, in deciding appeal, shall not be confined to grounds set forth in memorandum of appeal or taken by leave of Tribunal under this rule : Provided that Tribunal shall not rest its decision on any other ground unless party who may be affected thereby has had sufficient opportunity of being heard on that ground." "Rule 27 : respondent, though he may not have appealed, may support order appealed against on any of grounds decided against him." "Rule 28 : Where Tribunal is of opinion that case should be remanded, it may remand it to authority from whose order appeal has been preferred or to ITO, with such directions as Tribunal may think fit." 20.4 Hon'ble Supreme Court in case of Hukumchand Mills (supra) after making reference to above Rules and after considering detailed facts of that case has observed as under : "In present case, subject matter of appeal before Tribunal was question as to what should be proper written down value of buildings, machinery, etc., of assessee for calculating depreciation allowance under s. 10(2)(vi) of Act. It was certainly open to Department, in appeal filed by assessee before Tribunal, to support finding of AAC with regard to written down value on any of grounds decided against it. It was argued on behalf of appellant that action of Tribunal in remanding case is not strictly justified by language of r. 27 or r. 12. Even assuming that rr. 12 and 27 are not strictly applicable, we are of opinion that Tribunal has got sufficient power under s. 33(4) of Act to entertain argument of Department with regard to application of para 2 of Taxation Laws Order and remand case to ITO in manner it has done. It is necessary to state that rr. 12 and 27 are not exhaustive of powers of Tribunal. Rules are merely procedural in character and do not, in anyway, circumscribe or control power of Tribunal under s. 33(4) of Act. We are accordingly of opinion that Tribunal had jurisdiction to entertain argument of Department in this case and to direct ITO to find whether any depreciation was actually allowed under Industrial Tax Rules and whether such depreciation should be taken into consideration for purpose of computing written down value." 21. In case of CIT vs. Mahalaxmi Textile Mills Ltd. (supra), Hon'ble apex Court has held that Tribunal, which has wide powers in respect of subject matter of appeal before it, can decide any question which is "material to subject matter" even though it was not raised by parties to appeal. 21.1 In case of CIT vs. P.B. Corporation (supra), Hon'ble Gujarat High Court has gone to extent of saying that powers available to appellate Court under order 41 r. 33 of CPC, are also available to Tribunal. In this case following observations have been made by Hon'ble Mr. Justice M.S. Shah, J, who delivered judgment : "M.S. Shah, J.'In this reference at instance of Revenue, following question is referred for our opinion in respect of asst. yrs. 1979-80 to 1983-84 : 'Whether, on facts and in circumstances of case, Tribunal was right in law in resorting matter to AAC for fresh decision of appeals when assessee had not filed any appeal against additions which have been sustained by AAC' ?'...... At this stage, we may also note provisions of order 41, r. 33 of CPC, which read as under : '33. Power of Court of appeal.'The appellate Court shall have power to pass any decree and make any order which ought to have been passed or made and to pass or make such further or other decree or order as case may require, and this power may be exercised by Court notwithstanding that require, and this power may be exercised by Court notwithstanding that appeal is as to part only of decree and may be exercised in favour of all or any of respondents or parties, although such respondents or parties may not have filed any appeal or objection and may, where there have been decrees in cross-suits or where two or more decrees are passed on one suit, be exercised in respect of all or any of decrees, although appeal may not have been filed against such decrees : Provided that appellate Court shall not make any order under s. 35A in pursuance of any objection of which Court from whose decree appeal is preferred has omitted or refused to make such order'. ... It is clear that appellate Court can pass appropriate orders and appellate powers may be exercised in favour of all or any of respondents or parties, although such respondents or parties may not have filed any appeal or objection against order giving rise to appeal. Apart from fact that provisions of s. 254(1) confer very wide powers on Tribunal, there is nothing in provisions of IT Act which would have effect of nullifying provisions of order 41, r. 33 of CPC, or principle underlying said provision that appellate Court may pass such order or decree as case may require and this would also include passing orders in favour of any of respondents although such respondent may not have filed any appeal or objection. In facts of instant case, AO exercised powers under provisions of s. 144 because notices under ss. 142(1) and 143(2) of IT Act were not complied with by assessee and ITO substantially enhanced assessment for concerned five years. Once Tribunal found that there was no warrant for assessing income at particular amounts mentioned hereinabove, it was but natural that entire matter was required to be kept at large and to permit parties to lead evidence. In this set of circumstances, assessee could not have been tied down to amounts assessed by AAC and Tribunal, therefore, rightly set aside assessment orders passed by AAC as well ...". 2 2 . In view of above, argument of learned counsel for assessee that Tribunal cannot suo motu consider issue which has not been considered by lower authorities or which has not been raised by parties before it, is not acceptable. If subject matter of appeal or any ground of appeal includes issue which requires proper adjudication then for deciding such subject matter or any other issue relatable to such subject matter, Tribunal can exercise its power under s. 254(1). only condition is that affected parties must be given full opportunity of being heard. 23. On basis of discussion made above, in relation to scope of retrospectively amended provision, as contained under s. 14A and on scope of proviso to that section and also on basis of discussion made with respect to powers of Tribunal, as referred to above, we proceed to decide and answer question No. 1 as under. 23.1 After considering legal position in relation to s. 14A and proviso attached thereto, we cull out following propositions on scope, ambit and applicability of provision contained under s. 14A and proviso as inserted w.e.f. 11th May, 2001. Powers of AO 24. Although in view of questions framed for our consideration, we are not required to deal with powers of AO, however, as questions referred to us, which involve examination of provisions of s. 14A and proviso attached thereto and which control powers of AO, in that context, we would like to make some observations relating to powers of AO also. (i) That AO is not entitled to make reassessment of concluded assessments or to amend assessment orders by taking recourse to rectification process under s. 154 relating to assessments prior to asst. yr. 2001- 02 and earlier assessment years by invoking provisions of s. 14A of IT Act. (ii) If assessments for asst. yr. 2001-02 and earlier years have not been concluded and are pending before AO then he shall give effect to amended law by invoking s. 14A if any issue relating to allowability of deduction in relation to exempt income arises before him. (iii) AO is not debarred in invoking s. 14A if CIT(A) or Tribunal gives direction to him for doing so i.e. if for carrying out direction of appellate Courts, invoking of s. 14A becomes necessary then restriction imposed by proviso to s. 14A will not restrain him from applying amended provisions of s. 14A. (iv) Where assessment order for asst. yr. 2001-02 or for earlier years on issue of deductibility of any expenditure has been set aside under s. 263 of IT Act for fresh adjudication, AO shall not be debarred from invoking s. 14A if application of s. 14A becomes necessary. 2 5 . CIT(A) can invoke provisions of s. 14A under following circumstances : (i) When matter relating to asst. yr. 2001-02 or earlier years is pending before CIT(A) and amended provision is applicable then amended provision cannot be ignored if subject matter pending for consideration before such appellate authority involves issue requiring adjudication by applying s. 14A. (ii) When facts placed before him at appellate stage involve issue relating to applicability of s. 14A, then he can invoke s. 14A, even if AO had not invoked s. 14A, because such provision was not in existence at time of passing assessment order. 2 6 . Tribunal shall have power to invoke provisions as contained in s. 14A inter alia in following situations : (a) Where assessment proceedings pertaining to asst. yr. 2001-02 and earlier years have not been concluded or finalized and matter is pending before Tribunal involving issue relating to deduction of expenses which also includes expenses incurred in relation to exempt income. (b) Tribunal can consider issue relating to applicability of s. 14A in relation to asst. yr. 2001-02 and earlier years either when ground is taken before it by any of party or even suo motu if issue arising before it requires adjudication by making reference to s. 14A and proviso attached thereto irrespective of fact that s. 14A was not invoked by any of lower authorities. 27. In above circumstances, Tribunal and CIT(A) can invoke provisions of s. 14A for deciding issue in proceedings pending before such authorities. Question No. 1 is answered in affirmative and in favour of Revenue. 28. Question No. 2 : Since we have decided question No. 1 in positive terms, answer to question No. 2 is covered by our findings on question No. 1. Hence, this question is decided accordingly. 2 9 . Question No. 3 : We will deal with two cases in following manner : I. Navin Bharat Industries Ltd. (ITA No. 220/Bom/1994, asst. yr. 1990-91) Facts of this case are as under : 29.1 assessee company established undertaking at export processing zone (SEEPZ), which was free trade zone within meaning of s. 10A. assessee claimed benefit of s. 10A for first three assessment years viz. 1982-83, 1988-89 and 1989-90. benefit was available for period of 5 years. In asst. yr. 1990-91 assessee incurred loss in respect of said undertaking. loss was adjusted against profits of some other units. AO disallowed loss and held that as profits of SEEPZ units were not taxable, loss could not be allowed. On appeal, learned CIT(A) confirmed action of AO. 29.1.1 assessee took various grounds to challenge decision of learned CIT(A) before Tribunal. Ground No. 4 as taken was as under : "The learned CIT(A) erred in upholding action of AO of not setting off loss incurred by SEPZ unit entitled for deduction under s. 10A against other business income of appellant without properly appreciating provisions of s. 10A of IT Act and purpose for which said deduction has been allowed." 29.1.2 query was raised by Bench during course of hearing regarding applicability of s. 14A. submission of learned counsel for assessee was that s. 14A was applicable only in respect of "expenditure incurred" in respect of income which is not includible in total income and does not deal with losses from that source. learned Departmental Representative on other hand submitted that amendment introduced under s. 14A brought on statute book, is effective from 1st April, 1962. 29.1.3 learned AM held that Tribunal cannot use that provision to disallow something by making use of same. findings of learned AM as contained in para 25 of order are as under : "25. Coming to s. 14A relied upon by learned Departmental Representative, we find that even though s. 14A has been given retrospective effect w.e.f. 1st April, 1962, operation of section has been made prospective. This was also clarified by Circular No. 11 of 2001, dt. 23rd July, 2001 [(2001) 169 CTR (St) 1]. According to circular, AO should not reopen assessments to disallow expenditure to earn exempt income by applying provisions of newly inserted s. 14A of Act. Further, in order to avoid controversy as to whether circular would be binding or not, amendment was made in s. 14A by inserting proviso which reads as under : 'Provided that nothing contained in this section shall empower AO either to reassess under s. 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under s. 154 for any assessment year beginning on or before 1st of April, 2001'." 29.1.4 learned JM on other hand took different view which is as under : "In my view according to provisions of s. 14A claim of assessee is not admissible. Proviso to above section deals with situation where assessment has got finality. In present case addition was made by AO and h s been upheld by CIT(A). appeal is pending before Tribunal, therefore, issue is alive. Proviso to s. 14A is applicable to situation where assessment has got finality and on such assessment provisions of s. 147 or 154 cannot be made applicable. In my view provision of s. 14A is applicable t o case of assessee and loss claimed is inadmissible. Tribunal is duty bound to consider provisions which is on statute. provisions of s. 14A has been brought into statute with retrospective effect from 1st April, 1962 and covers period under consideration. Therefore, in my view claim of assessee has to be rejected." 29.1.5 On difference of opinion of two Members, on this issue, learned Third Member after referring to relevant provisions and relevant circulars of CBDT observed as under : "15. learned JM did not discuss applicability of s. 14A of Act, vis-a-vis facts of present case. It was presumed that this section applies to case of assessee and as because it was made operative retrospectively; as such it was applied. Therefore, it is necessary to examine firstly whether s. 14A of Act can be applied in facts and circumstances of present case. Subject to its applicability, question apropos to its retrospective applicability would be pertinent for deciding this issue. 16. Sec. 14A reads as under : 'Expenditure incurred in relation to income not includible in total income.'For purposes of computing total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act.' 17. This section puts restriction on allowability of expenditure. Can this restriction be extended to loss also ? Whether loss could be construed to be expenditure ? Are some of questions, which need to be examined. 18. 'Spending' in sense of 'paying out or away' of money is primary meaning of 'expenditure'. 'Expenditure' is what is paid out or away and is something which is gone irretrievably. Expenditure relates to disbursements; that means something that trader paid out indicating sort of volition on his part. He chooses to pay out some disbursement; it is expense; it is something which comes out of his pocket. 'loss' is something different. That is not thing, which he expends or disburses. That is thing, which comes upon him ab extra. Business expenditure is allowable if it is laid out or expended wholly and exclusively for assessee's business, while business loss is allowable if it is of non-capital nature and is not only connected with trade but is incidental to trade itself. In assessing amount of profits and gains of year, account must necessarily be taken of all losses incurred, besides expenditure allowable under ss. 30 to 44D of Act. This view is buttressed by decision of apex Court rendered in case of CIT vs. S.C. Kothari 1974 CTR (SC) 137 : (1971) 82 ITR 794, 801, 802 (SC). Therefore, loss could not be construed to be expenditure. Sec. 14A of Act is applicable qua expenditure and not qua loss'." 29.1.6 On going through above observations of learned Third Member, it is clear that issue was not adjudicated after examining applicability of s. 14A and proviso attached to it, rather it was held that on facts of that case, issue was not about allowability of expenditure but was about loss and since "loss" is different from "expenditure", s. 14A is not applicable to loss. 29.1.7 After considering scope of s. 10A and after deciding issue, in last, learned Third Member has also observed as under : "In view of this finding, question whether s. 14A of Act is prospective or retrospective in operation, has become academic." 29.1.8 above sentence also indicates that learned Third Member did not go into relevant aspects of issue relating to scope and ambit of s. 14A and proviso attached thereto. 29.1.9 In our view, therefore, this decision is distinguishable, firstly because on facts, it was found that s. 14A is not applicable to cases where loss is claimed and secondly because after adjudicating main issue in view of provisions contained under s. 10A, learned Third Member, though concurred with learned AM, but did not himself finally express any opinion on scope and applicability of s. 14A. 29.1.10 Hence, in our view, decision is distinguishable on facts from facts of instant matter and therefore same is not applicable to facts of present case. II. decision in case of Hexa Securities & Finance Co. Ltd. (ITA No. 2308/Del/2004) facts relating to this matter are as under : 29.2 assessment under s. 143(3) was completed on 13th March, 2002 in case of assessee. matter pertained to asst. yr. 1999-2000. total receipts of assessee company amounting to Rs. 23,87,458 included sum of Rs. 23,15,802, which was dividend income and balance of Rs. 71,656 was interest received. AO did not consider provisions of s. 14A and did not disallow proportionate expenditure attributable to dividend income, which was not includible in total taxable income. CIT invoked power under s. 263 by holding that order of AO was erroneous and prejudicial to interest of Revenue because AO ignored provisions of s. 14A, which existed on statute at time when he was making assessment and which provisions were attracted in matter. assessee had filed appeal before learned CIT(A) against assessment order and further appeal before Tribunal, which was decided. On these facts, contention of assessee for challenging order of CIT under s. 263 was that since assessment proceedings had been completed and concluded by order of Tribunal, in view of proviso attached to s. 14A, CIT was not empowered to direct AO to apply provisions of s. 14A by passing order under s. 263. main contention of Revenue was that proviso only debars AO from exercising power under ss. 147 and 154 in relation to completed assessments relating to asst. yr. 2001-02 and earlier years and that proviso does not debar CIT from exercising power under s. 263. 29.2.1 Tribunal accepted this contention and upheld order of CIT(A) passed under s. 263 by observing as under : "25. On carefully going through proviso to s. 14A, we find that in fact legislature never intended to restrict reversionary powers of CIT under s. 263 or powers of appellate authorities already conferred on them under statute in considering provisions of s. 14A while considering matters, which come up for consideration before them otherwise, legislature could have also included their names along with AO in restricting their powers. Since in proviso to s. 14A of Act s. 263 has been omitted it means that revisional powers of CIT under s. 263 have not been included under proviso below s. 14A of Act. 26. Now again reverting to uncontroverted facts we find that in instant case assessment under s. 143(3) was framed by AO on 13th March, 2002. s. 14A had already been inserted by Finance Act, 2001 w.e.f. 1st April, 1962. assessee has earned dividend income of Rs. 23,15,802. As per s. 10(33) of Act income from dividend was exempt, therefore, as per s. 14A deduction in respect of expenditure in relation to exempted income, which does not form part of total taxable income, was not allowable. It means while framing assessment AO was duty bound to take note of abovementioned statutory provisions for coming to conclusion that expenditure, which was attributable to dividend income was not includible in total taxable income and hence not allowable. Since AO has not done so while framing assessment under s. 143(3) order of AO was erroneous as well as prejudicial to interest of Revenue. 27. Now, in these facts we are not required to consider whether proviso to s. 14A restricts powers of AO under ss. 147 and 154 for reopening/rectifying assessment order already framed by him as in this case CIT has used his jurisdiction under s. 263 because AO was dutybound to consider provisions of s. 14A at time of framing assessment but he failed to do so. Hence, insertion of proviso to s. 14A in statute is of no significance in facts and circumstances of case of assessee. For reasons stated above, we are of clear view that neither proviso to s. 14A is relevant in instant case nor restrictions imposed upon AO by proviso have any effect on powers of CIT conferred under s. 263 of Act. 28. We have already held that AO while considering allowance of t h e interest expenditure in assessment order had completely ignored to consider and apply provisions of s. 14A of Act r/w s. 10(33) of Act which existed at time of framing assessment on 13th March, 2002 hence this assessment order was erroneous and prejudicial to interest of Revenue and hence CIT has rightly invoked his powers under Explanation to s. 263(1) of Act in view of ratio of decisions of apex Court in case of Shri Arbuda Mills Ltd. (supra) wherein they held that as per Explanation to s. 263(1) introduced w.e.f. 1st June, 1989 extends to such items, which have not been considered and decided in appeal filed by assessee because from ratio of decision (supra) we can safely conclude that even powers of CIT under s. 263 would also definitely extend to those assessment orders passed by AO in which he has neither considered nor applied existing statutory provisions o f s. 14A of IT Act nor same were applied and considered by 1st appellate authority or by 2nd appellate authority." 29.2.2 On perusal of order of Tribunal, it is clear that according to it, proviso attached to s. 14A only controls and excludes powers of ITO in relation to asst. yr. 2001-02 and earlier years by taking recourse to ss. 147/148 and 154 of IT Act, 1961. It may be pointed out that Tribunal has also considered decision of Cochin Bench of Tribunal in case of Paul John, Delicious Cashew Co. vs. ITO (supra) and agreed with Revenue that facts of that case were distinguishable. It has been pointed out that in that case return was processed under s. 143(1) on 27th Dec., 2001 and AO had very limited scope under amended provisions of s. 143(1) of Act. Therefore, AO had no occasion to consider allowability of expenditure with reference to provisions of s. 14A of Act, though same were existing on statute at that time. Whereas, in case of Hexa Securities (supra), assessment was completed under s. 143(3). 29.2.3 In our view, decision of Tribunal in case of Hexa Securities (supra) though it was in relation to s. 263, is based upon correct interpretation of s. 14A and proviso attached thereto and same is relevant to issue raised before Special Bench. 29.2.4 In view of above, whereas, decision in first case i.e. Navin Bharat (supra) is distinguishable, same is not to be followed and decision in second case i.e. Hexa Securities (supra) is based on correct appreciation of provisions contained under s. 14A and proviso attached thereto and same has to be followed and applied. 29.3 question is, therefore, answered accordingly. 30. Hon'ble President has also directed Special Bench to decide appeal. Hence, we proceed to decide appeal filed by assessee. grounds of appeal raised by assessee are as under : (i) That on facts and in circumstances of case, and under provisions of law, lower authorities have erred in disallowing interest to tune of Rs. 12,94,978. (ii) That petitioner reserves right to assail assessment on any additional ground, which may be advanced at time of hearing of appeal. 30.1 Briefly stated facts of case are as follows : assessee during relevant year derived income from business of sub-letting of properties. In addition, it also received income from interest and dividend. assessee received interest income of Rs. 6,79,968 on inter-corporate deposits and received dividend income of Rs. 3,06,630 from share investment in subsidiary company. dividend related to financial year 1995-96 but same was declared and received on 9th May, 1997 i.e. during relevant assessment year. assessee had declared entire income from sub-letting, interest and dividend as business income. assessee paid interest of Rs. 20,34,339 on borrowings made, which was claimed as deduction. assessee explained before AO that it had composite business activity of sub-letting, inter- corporate deposits and investment in shares and therefore, interest on borrowings made for such business activities could not be disallowed even if some borrowings had been invested in tax-free income generating assets. Reliance was placed on judgment of Hon'ble Supreme Court in case of Indian Bank (supra). It was also submitted that there was no nexus between borrowings and investment in shares. assessee further submitted that even if view was taken that interest was to be disallowed in relation to dividend income, dividend was exempt only from 1st June, 1997 and no interest could, therefore, be disallowed for period upto 31st May, 1997. AO was not satisfied. It was held by him that sub-letting was only business activity of assessee and for this business borrowing was not required. He assessed interest and dividend as income from other sources. As dividend related to financial year 1995-96, AO held that interest on borrowings utilized for investment in shares had no nexus with income from dividend. Moreover, he further observed that dividend income was exempt under s. 10(33). Considering all these factors, he allowed deduction of interest proportionate to borrowings invested in inter-corporate deposits, which had earned interest of Rs. 6,79,678. balance interest of Rs. 12,94,978 (20,34,339 - 6,79,678) was disallowed as not incurred for purpose of business. In appeal, assessee reiterated submissions made before AO. CIT(A), however, upheld view taken by AO that interest and dividend income was to be assessed under head 'Other sources'. He confirmed part disallowance of interest after observing that borrowings to that extent were not wholly and exclusively used for purpose of business. Aggrieved by said decision, assessee is in appeal and entire disallowance of interest is subject matter of dispute before Tribunal. 30.2 Before us, learned Authorised Representative for assessee argued that dividend income earned during year had been offered for tax. It was submitted that there was no interest-free advance given to any person and borrowings had thus not been utilised for any tax-free income. Therefore, there was no case for disallowance. learned Authorised Representative for assessee also argued that even if dividend income was exempt, assessee had composite activity of sub-letting, inter-corporate deposits and investment in shares and therefore, interest on borrowings utilized for composite business activities has to be allowed even if some of activities did not yield any taxable income. Reliance was placed on judgment of Hon'ble Supreme Court in case of Indian Bank (supra) and in case of Rajasthan State Warehousing Corporation (supra). attention of learned Authorised Representative was drawn to s. 14A which was inserted by Finance Act, 2001 with retrospective effect from 1st April, 1962 as per which any expenditure incurred by assessee in relation to income which did not form part of total income, was not allowable. learned Authorised Representative then came up with plea that even if s. 14A was applicable, Tribunal had no power to disallow interest in view of proviso to s. 14A inserted by Finance Act, 2002 as per which AO was not empowered to reopen or rectify any assessment for asst. yr. 2001-02 and earlier years. It was argued that in case AO was not empowered to reopen or rectify any assessment for asst. yr. 2001-02 and earlier years, Tribunal could also not take any action in relation to disallowance of expenses relating to those years as it would amount to enhancing amount for which Tribunal had no powers. It was also pointed out that assessment order in this case had been passed on 20th March, 2001 when s. 14A was not on statute. 30.3 We have already examined issue regarding applicability of s. 14A by appellate authorities and have held in earlier part of this order that CIT(A) and Tribunal are empowered to apply provisions of s. 14A in appeals pending before them for asst. yr. 2001-02 and earlier years even if s. 14A had not been invoked by AO or said provision was not available at time of assessment. In this case, though assessment for asst. yr. 1998- 99 had been completed by AO before s. 14A was inserted on statute, but appeal for said year is still pending before Tribunal. dispute raised before Tribunal is disallowance of interest on borrowings part of which prima facie have gone into investment in shares yielding tax-free income which is clear from balance sheet for relevant year placed on record. perusal of balance sheet shows that in beginning of year i.e. on 1st April, 1997, funds available with assessee were to tune of Rs. 145 lacs, which consisted of own funds of Rs. 22.60 lacs and borrowings of Rs. 122.40 lacs. As against that, investments were : Rs. 16.42 lacs in fixed assets; Rs. 88.82 lacs in shares and balance in loans and advances. investment in shares remained for entire year as closing balance of shares was Rs. 98.70 lacs. borrowings also continued with closing balance of Rs. 115.70 lacs. These figures clearly show that substantial borrowings were utilized for investment in shares as own funds were only to tune of Rs. 22.60 lacs out of which investment in fixed assets alone was Rs. 16.42 lacs. investments in shares of subsidiary company are long-term investments and are not held as trading stock. dividend income received/receivable from investment in shares is not taxable w.e.f. 1st June, 1997. In this year since dividend was received on 9th May, 1997 for earlier year, it was taxable and had rightly been offered for tax. But after record date in May, 1997, any dividend that may be received after 1st June, 1997 is not taxable. Therefore, borrowings utilized in investment of shares are not going to yield any taxable income after 31st May, 1997. Thus, interest on borrowings utilized in investment in shares for period 1st June, 1997 to 31st March, 1998, is not allowable as deduction while computing taxable income of assessee in view of s. 14A. In fact, assessee, before lower authorities had made alternate submission that disallowance of interest if any could be made only for period 1st June, 1997 to 31st March, 1998. There is prima facie case as pointed out earlier that substantial borrowings have been utilized for investment in shares. However, exact computation of interest on borrowings utilized for investment in shares will require detailed scrutiny. We, therefore, restore this issue to file of AO for quantification of interest for period 1st June, 1997 to 31st March, 1998 in respect of borrowings utilized for investment in shares and same will be disallowed. balance interest will be allowed as deduction as no other tax-free income has been brought to our notice. We order accordingly. 3 1 . Consequently, ground taken by assessee is allowed for statistical purposes. 32. While parting with matter, we would like to record our appreciation for assistance rendered by learned counsel for assessee Shri R.M. Mehta and learned counsel for intervener Shri P.F. Kaka, who have elaborated each point and have brought sufficient material for our study and examination. Similarly, we commend efforts made by Shri Rajnish Kumar and Shri K.C. Jain, learned CIT'Departmental Representatives, who have rendered great assistance by submitting their oral and written submissions duly rendered great assistance by submitting their oral and written submissions duly supported by relevant case laws. We would also like to point out that although we have examined all case laws referred to by learned representatives of parties during course of hearing but we have considered only relevant case laws and have not discussed other cases which, in our view, are not relevant and mention of which would unnecessarily add to bulk of this order. 33. In result, appeal stands allowed for statistical purposes and is decided accordingly. *** AQUARIUS TRAVELS (P) LTD. v. INCOME TAX OFFICER