Section 14-A was introduced in the Income tax Act 1961 with retrospective effect from April 1, 1962. However, the proviso to this section specifies that the assessing officer would not be able to reassess the income or pass an order enhancing the assessment for any assessment year beginning on or before April 1, 2001.

The moot question is whether this proviso debars the appellate authorities from applying section 14-A of the Act in respect of earlier assessment years. The terminology and the language adopted in the proviso to section 14-A is very clear. As per its plain meaning, what the proviso protects is pre-existing assessment orders and it prohibits the assessing officer from unsettling them by recourse to the provisions contained under section 147 or section 154.

The proviso therefore, excludes the jurisdiction of an assessing officer to reassess the income or to rectify assessments for years up to the assessment year 2001-02, so far as section 14-A is concerned. The language adopted in the proviso is specific.

Only reassessments under section 147 and rectification of assessments already made have been debarred. The power of the commissioner (appeals) and those of the Appellate Tribunal cannot be curtailed. The proviso has to be construed strictly, as it has the effect of curtailing the ambit and operation of the main provision only to a limited extent. It cannot nullify the whole of the provision. Thus, if the proviso is given wider effect than intended by the legislature, it would frustrate the object of the amendment of section 14-A, which has been introduced intentionally with retrospective effect by the legislature.

If the restriction was to be applied to other areas and was to cover other authorities for curtailing their powers, it could have been specifically so provided. The powers of these authorities are to be exercised as per the provisions of the Act and no restriction can be inferred from the proviso. Under the Act, the powers of the assessing officer are well defined. These powers include power of reassessment and rectification. Only these two powers cannot be exercised by the assessing officer in relation to completed assessments for the assessment year 2001-02 and earlier years.

The assessing officer is not debarred from invoking section 14-A if the commissioner (appeals) or the appellate tribunal directs him to do so. If for giving effect to the direction of appellate authorities the invoking of section 14-A becomes necessary, then the restriction imposed by the proviso to section 14-A will not restrain him from applying the amended provisions of section 14-A.

Where an assessment order for the assessment year 2001-02 or for earlier years on the issue of deductibility of any expenditure has been set aside under section 263 of the Act for fresh adjudication, the assessing officer is not debarred from invoking section 14-A, if the application of this section becomes necessary.

The commissioner (appeals) can invoke this provision if the matter relating to the assessment year 2001-02 or earlier years is pending before him, where the issue requires adjudication by applying section 14-A, or when the facts placed before him at the appellate stage involve the issue relating to the applicability of section 14-A.

The appellate tribunal has the power to invoke the provisions of section 14-A, where the assessment proceedings pertaining to the assessment year 2001-02 and earlier years have not been concluded or finalised and the matter is pending before the appellate tribunal involving the issue relating to deduction of expenses, which also includes expenses incurred in relation to the exempt income, or when a ground is taken before it by any of the parties, irrespective of the fact that section 14-A was not invoked by any of the lower authorities.

If the subject-matter of appeal or any ground of appeal includes an issue, which requires proper adjudication, for deciding such subject-matter or any other issue relatable to such subject-matter, the appellate tribunal can exercise its power under section 254(1). The only condition is that the affected parties must be given full opportunity of being heard.

This issue was considered by a special bench of the Income tax appellate tribunal in Aquarius Travels P Ltd v Income tax officer (ITA No 260/Del/2002). The facts in this case were that the assessee during the previous year relevant to the assessment year 1998-99 derived income from sub-letting properties and from interest on intercorporate deposits and dividend (which related to the financial year 1995-96 but was declared and received on May 9, 1997) from investment in shares in a subsidiary company.

The assessee had declared the entire income from sub-letting, interest and dividend as business income.

The assessee paid interest on borrowings, which it claimed as deduction, contending that it had a composite business activity of sub-letting, placing inter-corporate deposits and investment in shares. Therefore, interest on borrowings made for such business activities could not be disallowed.

The assessing officer assessed the interest and dividend as income from other sources and allowed deduction only of such part of the interest, which was proportionate to the borrowings invested in the inter-corporate deposits, which had earned interest. In appeal, the commissioner (appeals) confirmed the part disallowance of interest.

On further appeal, during the course of which, section 14-A, which was inserted by the Finance Act 2001 with retrospective effect from April 1, 1962, the tribunal upheld the disallowance of interest on the borrowings, part of which prima facie had gone into the investment in shares yielding tax-free income, as evident from the balance-sheet. After the record date in May 1997, any dividend received after June 1, 1997, was not taxable.

Therefore, the borrowings utilied in the investment of shares did not yield any taxable income after May 31, 1997. Thus, the interest paid on borrowings utilised for investment in shares for the period June 1, 1997, to March 31, 1998, was not allowable as deduction while computing the taxable income of the assessee in view of section 14-A.

The bench concluded by holding that if the meaning of a statutory provision is plain and clear, then effect has to be given to the terminology used therein. In order to construe the two provisions (section 14-A and its proviso) so as to give the required effect to each, a harmonious construction of these provisions is necessary for avoiding the consequences of rendering one provision otiose at the cost of giving effect to the other.

The author is advocate, Supreme Court