Income Tax Rule 8D is prospective in operation and not apply prior to AY 2008­-09 – Supreme Court

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.

Income Tax Rule 8D is prospective in operation-Supreme Court

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. 

Decision/ Conclusion/Held:
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.

Income Tax Rule 8D is prospective in operation-Supreme Court

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One Response

  1. vswami March 28, 2018

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