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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