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Monday, 26 March 2018 12:24

Rule 8D is prospective in operation and cannot be applied to any assessment year prior to Assessment Year 2008­-09 - Supreme Court

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Can Rule 8D be Applied Retrospectively? - Held No


Applying  the principles of  statutory  interpretation for interpreting retrospectivity of a fiscal statute and looking into   the   nature   and   purpose   of   sub­section   (2)   and sub­section (3)  of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively.

Delay Condoned. Leave granted.

2. This appeal when alongwith several appeals were heard on 16.11.2016, this Court noticed that in batch of cases, four questions have arisen.   The present batch of cases of which Civil   Appeal   No.   2165   is   a   leading   case   relates   only   to Question No.2, which is to the following effect:­

“Whether   sub­section   (2)   and   sub­section   (3)   of Section   14A   inserted   with   effect   from   01.04.2007 will apply to all pending assessments? Whether Rule 8D is retrospectively applicable?”

3. All these appeals raising only above question of law have been   heard   together   and   are   being   decided   by   this   common judgment.   For   deciding   all   these   appeals,   it   shall   be sufficient to refer facts and proceedings in Civil Appeal No. 2165 of 2012.


Civil Appeal No. 2165 of 2012

4. This appeal has been filed against the judgment of Bombay High Court dated 12.09.2011 in Income Tax Appeal (L) No. 947 of  2011 by  which  judgment  the  High  Court  has  dismissed  the appeal filed by the Commissioner of Income Tax following an earlier judgment of the Bombay High Court dated 12.08.2010 in the   case   of  Godrej   Boyce   and   Manufacturing   Company   Limited Vs.   Deputy   Commissioner   of   Income   Tax,   Mumbai   &   Anr., reported in (2010) 328 ITR 81(Bom.).   The assessment year in issue is 2003­2004.  The assessee (respondent in appeal) filed his   return   of   income   on   01.12.2003   declaring   a   loss   of Rs.69,92,67,527/­.   A notice under Section 143(2) was issued to the assessee.   The Assessing Officer vide its order dated 27.03.2006 held that during the year under consideration, the assessee   company   was   in   receipt   of   both   taxable   and non­taxable   dividend   income.     Accordingly,   the   dividend   on investment exempt under Section 10(23G) was considered by the A.O.   for   the   purpose   of   disallowance   U/S.14A.     Hence, proportionate   interest   relating   to   investment   on   which exemption   u/s.10(23G)   is   available   as   per   the   working amounting   to   Rs.26   crores   was   disallowed   U/S.14A   r.w.s. 10(23G) of the I.T. Act. 

5. The assessee filed an appeal, which was partly allowed by order dated 05.03.2009.   The assessee filed an appeal before the ITAT.   The ITAT allowed the assessee’s appeal relying on the   Bombay   High   Court’s   judgment   in  Godrej   and   Boyce Manufacturing   Company   Limited   versus   Deputy   Commissioner   of Income   Tax,   Mumabi   &   Another.,   reported   in   (2010)   328   ITR 81(Bom.).  The ITAT held that Rule 8D is only prospective and in the year under consideration Rule 8D was not applicable. ITAT set aside the order of CIT(A) and restored the issue back to the file of the Assessing Officer for de novo adjudication without invoking the provisions of Rule 8D.  Against the order of ITAT, the revenue filed an appeal before the High Court. The High Court following its earlier judgment of  Godrej and Boyce   Manufacturing   Company   Limited   Vs.   Deputy   Commissioner of   Income   Tax,   Mumbai   &   Anr.   (supra)  dismissed   the   appeal. The Commissioner of Income Tax aggrieved by the judgment of the High Court has come up in this appeal. 

6. In the appeal, the only question, which has been pressed for our consideration is the first question, which was raised before the High Court, which is to the following effect:­

“Whether on the facts and circumstance of the case and in law, the Hon’ble ITAT is right in holding that applicability of Rule 8D is only prospective in operation and for the year under assessment it was not applicable?”

7. Thus, in this batch of appeals, the only question to be considered and answered is as to whether Rule 8D of Income Tax Rules is prospective in operation as held by the High Court or it is retrospective in operation and shall also be applicable in   the   assessment   year   in   question   as   contended   by   learned counsel for the revenue.

8. We   have   heard   Shri   Yashank   Adhyaru,   learned   senior counsel, Shri Arijit Prasad, learned counsel for the appellant Shri S.K. Bagaria, learned senior counsel, Shri Ajay Vohra, learned   senior   counsel   and   other   learned   counsel   have   been heard for different assessees in this batch of appeals. 


9. Learned counsel for the appellant (revenue) submit that provisions of Section 14A being clarificatory in nature and Rule   8D   is   a   procedural   provision   which   provided   only   a machinery for the implementation of sub­sections (2) and (3), Rule 8D is retrospective in nature.  The machinery provisions by which the charging section is to be implemented or workable are   to   be   given   retrospective   effect,   which   is   co­terminus with the period of operation of the main charging provision. The   charging   section   i.e.   Section   14A   admittedly   being retrospective, the machinery provision, i.e. Rule 8D has also to be retrospective.  

10. Learned   counsel   for   the   revenue   has   placed   reliance   on judgments   of   this   Court,   i.e.,  Commissioner   of   Wealth   Tax, Meerut   Vs.   Sharvan   Kumar   Swarup   &   Sons,   (1994)   6   SCC   623; Commissioner of Income Tax I, Ahmedabad Vs. Gold Coin Health Food   Private   Limited,   (2008)   9   SCC   622   and   Commissioner   of Income Tax – III Vs. Calcutta Knitwears, Ludhiana, (2014) 6 SCC 444.

11. Shri S.K. Bagaria, learned senior counsel appearing for the assessee refuting the submission of learned counsel for the   revenue   contends   that   provisions   of   Rule   8D   are   only prospective in nature.   He submits that when a new liability is imposed by a statutory provision then the same cannot be retrospective.  He submits that provisions inserted by Rule 8D are new provision for computing the expenditure which can in no manner be retrospective.  He submits that Rule 8D was made applicable by Fifth Amendment Rules, 2008 providing in Clause 2   i.e.   “they   shall   come   into   force   from   the   date   of   their publication   in   the   official   gazette”.     He   submits   that   the Central   Board   of   Direct   Taxes   vide   its   circular   dated 28.12.2006 while explaining the substance of the provision of sub­sections (2) and (3) of Section 14A clearly mention that the aforesaid provisions were to be applicable from assessment year 2007­2008 onwards.   Hence, Rule 8D, which is framed to give   effect   to   the   provisions   of   sub­sections   (2)   and   (3) cannot   operate   from   any   date   prior   to   assessment   year 2007­2008.

12. Shri   Ajay   Vohra,   learned   senior   counsel   appearing   for assessee submits that Rule 8D has been amended by Income Tax (14th  Amendment Rules, 2016) w.e.f. 02.06.2016 by which a new methodology of computing the expenditure in relation to income which does not form part of the total income has been brought in place.  In event, the argument is accepted that Rule 8D is retrospective, which rule shall hold the field, whether Rule 8D   as   inserted   w.e.f.   24.03.2008   or   one   which   has   been substituted   w.e.f.   02.06.2016?   The   amendment   made   w.e.f. 02.06.2016   reinforces   that   the   methodology   of   computing   the expenditure in relation to income which does not form part of the   total   income   is   prospective   and   has   been   change   w.e.f. 02.06.2016,   no   other   interpretation   is   permissible.     He further   submits   that   subordinate   legislation   is   ordinarily prospective and Rule 8D being subordinate legislation can have no retrospective effect.   Learned counsel for the assessees have also placed reliance on various decisions of this Court, which shall be referred to while considering the submissions in detail.

41. The   three­Judge   Bench   also   referred   to   Departmental Circular   dated   24.07.1976,   which   was   found   relevant   for interpreting   for   finding   out   the   nature   of   the   amended provision. The three­Judge Bench, further held in Para 16 to the following effect: 

"16. The law  is  well  settled  that  the  applicable provision would be the law as it existed on the date   of   the   filing   of   the   return.   It   is   of relevance to note that when any loss is returned in any return it need not necessarily be the loss of   the   previous   year   concerned.   It   may   also include carried­forward loss which is required to be set up against future income under  Section 72 of the Act. Therefore, the applicable law on the date   of   filing   of   the   return   cannot   be   confined only   to   the   losses   of   the   previous   accounting years.”

The three­Judge Bench, after noticing the earlier cases and   principles   of   the   statutory   interpretation   recorded following conclusion in para 21:

“21. Above   being   the   position,   the   inevitable conclusion   is   that   Explanation   4   to   Section 271(1)(c) is   clarificatory   and   not   substantive. The   view   expressed   to   the   contrary   in   Virtual case, (2007) 9 SCC 665 is not correct.”

The   above   case   is   also   clearly   distinguishable   and   not applicable in the facts of the present case. It was held that amendments were clarificatory in nature, hence shall operate retrospectively. 

42. The Revenue has also relied on the judgment of this Court in  Commissioner of Income Tax­III versus Calcutta Knitwears, Ludhiana,   (2014)   6   SCC   444.     The   above   judgment   has   been relied by the Revenue for the preposition that it is the duty of the Court, while interpreting machinery   provisions of a taxing statute to give effect to its manifest purpose. In para 34 following was laid down: 

“34. It is the duty of the court while interpreting the   machinery   provisions   of   a   taxing   statute   to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the courts ought not be hesitant in espousing a commonsense interpretation to the machinery provisions so that the charge does not fail. The machinery provisions must,   no   doubt,   be   so   construed   as   would effectuate the object and purpose of the statute and not defeat the same (Whitney v. IRC, 1926 AC 37 (HL), CIT  v. Mahaliram Ramjidas,  (1940) 8 ITR 442, Indian United Mills Ltd. v. Commr. of Excess Profits   Tax,   (1955)   27   ITR   20(SC),   and   Gursahai Saigal v. CIT,(1963) 48 ITR 1(SC); CWT v. Sharvan Kumar   Swarup   &   Sons,   (1994)   6   SCC   623;  CIT   v. National Taj Traders, (1980) 1 SCC 370; Associated Cement Co. Ltd. v. CTO, (1981) 4 SCC 578. Francis Bennion   in   Bennion   on   Statutory   Interpretation, 5th Edn., Lexis Nexis in support of the aforesaid proposition   put   forth   as   an   illustration   that since charge made by the legislator in procedural provisions   is   excepted   to   be   for   the   general benefit   of   litigants   and   others,   it   is   presumed that   it   applies   to   pending   as   well   as   future proceedings.”

 43. There   cannot   be   any   dispute   to   the   preposition   that machinery provision of of taxing statute has to give effect to its manifest purposes.  But the applicability of the machinery provision whether it is prospective or retrospective depends on   the   content   and   nature   of   the   Statutory   Scheme.   In   the above   case,   the   Court   was   not   considering   the   question   of prospectivity or retrospectivity of the machinery provision, hence the above case also does not help the appellant in the present case.

44. The   Constitution   Bench   in  Commissioner   of   Income   Tax (Central)­I, New Delhi versus Vatika Township (supra), after noticing the principle of Statutory Interpretation, as noted above, has laid down the following in para 36,  37 and 39: 

“36. In  CIT v. Scindia Steam Navigation Co. Ltd., AIR   1961   SC   1633,   this   Court   held   that   as   the liability to pay tax is computed according to the law   in   force   at   the   beginning   of   the   assessment year   i.e. the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless   specifically   made   retrospective,   does   not apply to the assessment for that year. 

Answer to the reference

37.   When   we   examine   the   insertion   of   proviso   in Section   113 of   the   Act,   keeping   in   view   the aforesaid principles, our irresistible conclusion is   that   the   intention   of   the   legislature   was   to make it prospective in nature. This proviso cannot be treated as declaratory/statutory or curative in nature.”

Reasons in support

“39. The first and foremost poser is as to whether it was possible to make the block assessment with the addition of levy of surcharge, in the absence of   proviso   to  Section   113?   In   Suresh   N.   Gupta itself, it was acknowledged and admitted that the position prior to the amendment of Section 113 of the   Act   whereby   the   proviso   was   added,   whether surcharge   was   payable   in   respect   of   block assessment   or   not,   was   totally   ambiguous   and unclear. The Court pointed out that some assessing officers had taken the view that no surcharge is leviable.   Others   were   at   a   loss   to   apply   a particular   rate   of   surcharge   as   they   were   not clear   as   to   which  Finance   Act,   prescribing   such rates,   was   applicable.   It   is   a   matter   of   common knowledge   and   is   also   pointed   out   that   the surcharge varies from year to year. However, the assessing officers were indeterminative about the date with reference to which rates provided for in the  Finance Act  were to be made applicable. They had four dates before them viz.:(Suresh N. Gupta case, (2008) 4 SCC 362, SCC p. 379, para 35)

(i)   Whether   surcharge   was   leviable   with reference   to   the   rates   provided   for   in the Finance Act of the year in which the search was initiated; or

(ii)   the   year   in   which   the   search   was concluded; or

(iii)   the   year   in   which   the   block assessment   proceedings   under   Section 158­BC of the Act were initiated; or (iv) the year in which block assessment order was passed.”

45. As noted above, that Rule 8D has again been amended by Income   Tax   (Fourteenth   Amendment)     Rules,   2016   w.e.f. 02.06.2016, by which Rule 8D sub­rule (2) has been substituted by a new provision which is to the following effect:

[(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:­

(i) the   amount   of   expenditure   directly relating   to   income   which   does   not   form part of total income; and

(ii) an  amount equal  to  one  per  cent  of the   annual   average   of   the   monthly averages   of   the   opening   and   closing balances   of   the   value   of   investment, income from which does not or shall not form part of total income:

Provided that the amount referred to in clause (i) and   clause   (ii)   shall   not   exceed   the   total expenditure claimed by the assessee.]

46. The   method   for   determining   the   amount   of   expenditure brought in force w.e.f. 24.03.2008 has been given a go­bye and a new method has been brought into force w.e.f. 02.06.2016, by interpreting   the   Rule   8D   retrospective,   there   will   be   a conflict in applicability of 5th  & 14th  Amendment Rules which clearly indicates that the Rule has a prospective operation, which   has   been   prospectively   changed   by   adopting   another methodology.

47. One of the submissions raised by the learned counsel for the assessee also needs to be noticed. Learned counsel for the assessee   submits   that   it   is   well­settled   that   subordinate legislation ordinarily is not retrospective unless there are clear   indication   to   the   same.   Reliance   has   been   placed   on judgment of this Court in State of Jharkhand & Ors. Vs. Shiv Karampal  Sahu,  (2009)  11  SCC  453. In  para 17  following  has been stated:

“17. Ordinarily, a subordinate legislation should not be construed to be retrospective in operation. The   Circular   Letter   dated   7­5­2003   was   given   a prospective effect. The father  of  the  respondent died on 19­5­2000. There is nothing to show that even   Circular   dated   9­8­2000   had   been   given retrospective effect. In any view of the matter, as the State of Jharkhand in the Circular Letter dated   7­5­2003   adopted   the   earlier   circular letters   issued   by   the   State   of   Bihar   only   in respect   of   cases   where   death   had   occurred   after 15­10­2000 i.e. the date from which the State of Jharkhand came into being, the High Court, in our opinion,   committed   a  serious   error   in   giving retrospective   effect   thereto   indirectly   which   it could   not   do   directly.   Reasons   assigned   by   the High   Court,   for   the   reasons   aforementioned,   are unacceptable.”

There is no indication in Rule 8D to the effect that Rule 8D intended to apply retrospectively. 

48. Applying  the principles of  statutory  interpretation for interpreting retrospectivity of a fiscal statute and looking into   the   nature   and   purpose   of   sub­section   (2)   and sub­section (3)  of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively.

49. It   is   relevant   to   note   that   impugned   judgment   in   this appeal   relies   on   earlier   judgment   of   Bombay   High   Court   in Godrej and Boyce Manufacturing Company Limited versus Deputy Commissioner of Income Tax, Mumbai and Another, (2017) 7 SCC 421, where the Division Bench of the Bombay High court after elaborately   considering   the   principles   to   determine   the prospectivity   or   retrospectivity   of   the   amendment   has concluded that Rule 8D is prospective in nature. Against the aforesaid judgment of the Bombay High court dated 12.08.2010 an appeal was filed in this court which has been decided by vide  its judgment reported in  Godrej and Boyce Manufacturing Company Limited Vs. Deputy Commissioner of Income Tax, Mumbai & Anr. (2017) 7 SCC 421. This Court, while deciding the above appeal repelled the challenge raised by the assessee regarding vires of Section 14A. In para 36 of the judgment, this Court noticed   that   with   regard   to   retrospectivity   of   provisions Revenue had filed appeal, hence the said question was not gone into   the   aforesaid   appeal.   In   the   above   case,   this   Court specifically   left   the   question   of   retrospectivity   to   be decided in other appeals filed by the Revenue. We thus have proceeded to decide the question of retrospectivity of Rule 8D in these appeals.

50. In view of our opinion as expressed above, dismissal of the appeal by the Bombay High Court is fully sustainable. As held above, the Rule 8D is prospective in operation and could not   have   been   applied   to   any   assessment   year   prior   to Assessment Year 2008­09.

51. In   result,   all   the   appeals   filed   by   the   Revenue   are dismissed.

Cases Referred to

1. Godrej   Boyce   and   Manufacturing   Company   Limited Vs.   Deputy   Commissioner   of   Income   Tax,   Mumbai   &   Anr., reported in (2010) 328 ITR 81(Bom.)

2.  Commissioner   of   Wealth   Tax, Meerut   Vs.   Sharvan   Kumar   Swarup   &   Sons,   (1994)   6   SCC   623

3. Commissioner of Income Tax I, Ahmedabad Vs. Gold Coin Health Food   Private   Limited,   (2008)   9   SCC   622

4. Commissioner   of Income Tax – III Vs. Calcutta Knitwears, Ludhiana, (2014) 6 SCC 444


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Additional Info

  • Order Date: Wednesday, 31 January 2018
  • Court: Supreme Court
  • Cout Name: Supreme Court of India
  • Section: 14A, 10(23G), 147, 154, 171, 144, 143, 25-A, 113, 29(2), 115
  • Favouring: Assessee
Read 1350 times Last modified on Thursday, 29 March 2018 12:40

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