Income Tax Rule 8D is prospective in operation and could not apply to any assessment year prior to AY 2008-09 – Supreme Court settles the law
ABCAUS Case Law Citation:
ABCAUS 2188 (2018) (01) SC
Important Case Laws Cited/relied upon by the parties:
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; Govind Das and others Versus the Income Tax officer and another 1976 (1) SCC 906; The Commissioner of Income Tax (Central –1 New Delhi) Vs. Vatika Township Pvt. Ltd., 2015 (1) SCC 1; Jayam and company Vs. Assistant Commissioner & Ors., (2016) 15 SCC 125; Commissioner of Wealth Tax, Meerut versus Sharvan Kumar Swarup & Sons, (1994) 6 SCC 623; Commissioner of Income TaxIII versus Calcutta Knitwears, Ludhiana, (2014) 6 SCC 444; State of Jharkhand & Ors. Vs. Shiv Karampal Sahu, (2009) 11 SCC 453.
Brief Facts of the Case:
The respondent assesseehad filed his return of income declaring a loss. His case was selected for scrutiny and a notice under Section 143(2) of the Income Tax Act, 1961 (the Act) was issued to the assessee. The Assessing Officer held that during the year under consideration, the assessee company was in receipt of both taxable and non taxable dividend income. Accordingly, the dividend on investment exempt under Section 10(23G) was considered by the AO for the purpose of disallowance u/s 14A.
Accordingly, proportionate interest relating to investment on which exemption u/s 10(23G) was available was disallowed invoking the provisions of section 14A read with Rule 8D the Act. While the CIT(A) partly allowed the appeal of the assessee, the ITAT allowed the assessee’s appeal relying on the judgment of the Bombay High Court.
The ITAT held that Rule 8D is only prospective and in the year under consideration Rule 8D was not applicable. The Revenue challenged the order of the ITAT before the High Court. The High Court following its earlier judgment dismissed the appeal. The Income Tax Department being aggrieved by the judgment of the Bombay High Court was before the Hon’ble Supreme Court.
The question of Law framed/urged:
The question that fall for the consideration of Hon’ble Supreme Court was as to whether the applicability of Rule 8D is only prospective?
Observations made by the Supreme Court:
The Hon’ble Supreme Court observed that Section 14A was first inserted by Finance Act, 2001 with retrospective effect w.e.f. 01.04.1962 and the Rule 8D has been framed to give effect to the provisions of Section 14A subsection (2) and (3) of the Act. The statutory scheme as delineated by Section 14A has to be understood before correctly appreciating the nature and purport of Rule 8D.
The Hon’ble Supreme Court observed that Rule 8D was inserted by Notification dated 24.03.2008 providing for the method for determining the amount of expenditure in relation to income not includible in total income.
The Hon’ble Supreme Court stated that the legislature has plenary power of legislation within the fields assigned to them, it may legislate prospectively as well as retrospectively. It is a settled principle of statutory construction that every statute is prima facie prospective unless it is expressly or by necessary implications made to have retrospective operations. Legal Maxim “nova constitution futuris formam imponere debet non praeteritis“, i.e. ‘a new law ought to regulate what is to follow, not the past’, contain a principle of presumption of prospectively of a statute.
It was observed that the sub-section (2) and subsection (3) were inserted in Section 14A by the Finance Act, 2006. The memorandum explaining the provision in Finance Bill, 2006 in reference to the methods for allocating expenditure in relation to exempt income clearly mentioned that the amendments brought will take effect from 01.04.2007 and will accordingly, apply in relation to the assessment year 2007-08 and subsequent years.
The Hon’ble Supreme Court observed that notes of clause appended to the Finance Bill, in past, have been considered by the Constitution Bench to decipher the nature of the legislative scheme.
The Hon’ble Supreme Court also noted that the CBDT itself, in circular dated 28.12.2006 issued after the insertion of the sub section (2) (3) in Section 14A, mentioned the applicability of the provisions as from AY 2007-08 onwards.
It was observed that in the Notification dated 24.03.2008 which inserted the Rule 8D, Sub rule (2) provided as under:
“1. (1) These rules may be called the Income tax (Fifth Amendment) Rules, 2008.
(2). They shall come into force from date of their publication in the Official Gazette.”
The Hon’ble Supreme Court however clarified that well settled law is that the mere date of enforcement of statutory provisions does not conclude that the statute is prospective in nature. The nature and content of statute have to be looked into to find out the legislative scheme and the nature, effect and consequence of the statute.
The Hon’ble Supreme Court dealt in length with all the decisions relied upon by the Revenue in pressing its contention that Section 14A of the Act being clarificatory in nature having retrospective operation, Rule 8D, which is a machinery provisions have also to be held to be retrospective to make machinery provisions workable.
The Hon’ble Supreme Court opined that there is no indication in Rule 8D to the effect that Rule 8D intended to apply retrospectively.Their Lordships opined that 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, Rule 8D was intended to operate prospectively.
It was held that Income Tax Rule 8D is prospective in operation and could not apply to any assessment year prior to AY 2008-09.