Supreme Court of India
COMMISSIONER OF INCOME TAX 5 MUMBAIversusM/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER
- Citation
- 2018 INSC 79
- Decided
- 31 January 2018
- Disposal
- Dismissed
- Bench
- A K SIKRI
Holding
Rule 8D is prospective in operation and cannot be applied to any assessment year before AY 2008‑09.
Summary
The Commissioner of Income Tax (Mumbai) appealed against the Bombay High Court's dismissal of its challenge to the applicability of Rule 8D, which provides a method for computing expenditure under Section 14A of the Income Tax Act. The issue was whether Rule 8D, introduced by the Income‑Tax (Fifth Amendment) Rules, 2008, operated prospectively or retrospectively, and whether it could be applied to the assessment year 2003‑04. The Court examined the legislative history of Section 14A (inserted by Finance Act, 2001 and amended by Finance Act, 2006), the explanatory memorandum to the Finance Bill, 2006, and the CBDT circular of 28‑12‑2006, all of which indicated a prospective commencement from AY 2007‑08. Applying principles of statutory interpretation, the Court held that Rule 8D was intended to be prospective and could not be applied to assessments prior to AY 2008‑09. Consequently, the revenue's appeals were dismissed.
Issues considered
- Whether sub‑sections (2) and (3) of Section 14A, introduced by Finance Act, 2006, apply to pending assessments.
- Whether Rule 8D of the Income‑Tax Rules, 1962 is retrospective in operation.
Legislation cited
- Finance Act, 2001s. 14A (inserted)
- Finance Act, 2002s. Proviso to Section 14A
- Finance Act, 2006s. 14A(2), s. 14A(3), s. Clause 1(2)
- Income Tax Act, 1961s. 10(23G), s. 113, s. 147, s. 14A, s. 154, s. 171, s. 271
- Income Tax (Fifth Amendment) Rules, 2008s. Rule 8D (inserted)
- Income Tax (Fourteenth Amendment) Rules, 2016s. Rule 8D (amended)
- Income Tax Rules, 1962s. Rule 8D
Subjects
prospectivityretrospectivitystatutory interpretationSection 14ARule 8DIncome Tax Actassessment yearmachinery provisiontaxation
Judgment
502 [2018]REPORTS
SUPREME COURT 1 S.C.R. 502 [2018] 1 S.C.R.
A COMMISSIONER OF INCOME TAX 5 MUMBAI
v.
M/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER
(Civil Appeal No. 2165 of 2012)
B JANUARY 31, 2018
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]
Income Tax Rules, 1962 – r.8D – Said rule providing for
machinery to give effect to charging section, i.e. s.14A, Sub-sections
(2) and (3) of Income Tax Act, 1961 – Nature of operation –
C
Prospective or Retrospective – Plea of appellant-revenue that
charging section i.e. s.14A being retrospective, the machinery
provision,i.e. r.8D has also to be retrospective – Held: Provisions
of s.14A, inserted by Finance Act, 2001, were fully workable without
there being any mechanism provided for computing the expenditure
D incurred in relation to income which does not form part of the total
income – Sub-sections (2) and (3), providing to determine the amount
of such expenditure, were inserted by amendment in s.14A by
Finance Act, 2006 – Memorandum explaining the provision in
Finance Bill, 2006, clearly mentioned that amendments brought by
Finance Bill, 2006 would take effect from 01.04.2007 – Circular
E
dtd. 28.12.2006 issued by Central Board of Direct Taxes (CBDT)
itself also provided that sub-sections (2) and (3) of s.14A were to be
implemented w.e.f. 2007-08 – Further, r.8D was inserted in 1962
Rules by notification dtd. 24.03.2008 indicating that the new method
provided thereunder for computing the expenditure was to be utilized
F for the Assessment Year 2008-09 and onwards – There is no
indication in r.8D that it was intended to apply retrospectively –
Thus, applying the principles of statutory interpretation for
interpreting retrospectivity of a fiscal statute and looking into the
nature and purpose of sub-ss. (2) and (3) of s.14A as well as purpose
and intent of r.8D coupled with the explanatory memorandum in
G
the Finance Bill, 2006 and the departmental understanding as
reflected by Circular dated 28.12.2006, it is clear that r.8D was
intended to operate prospectively – Interpretation of Statutes –
Income Tax Act, 1961 – Finance Act, 2001 – Finance Act, 2006 –
Income Tax (14th Amendment Rules, 2016) – Circulars/Notifications
H – Circular No. 14/2006 dtd. 28.12.2006.
502
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 503
MANAGER
Interpretation of Statutes – Nature of operation – Prospective A
or retrospective – Held: Every statute is prima facie prospective unless
it is expressly or by necessary implication made to have retrospective
operation – However, mere date of enforcement of statutory
provisions does not lead to the conclusion that the statute is
prospective in nature.
B
Maxims – “nova constitutio futuris formam imponere debet
non praeteritis” – Principle of presumption of prospectivity of a
statute – Discussed.
Interpretation of Statutes – Machinery provision of a taxing
statute – Prospective or retrospective – Held: Applicability of the C
machinery provision whether it is prospective or retrospective
depends on the content and nature of the statutory scheme.
Dismissing the appeals filed by Revenue, the Court
HELD: 1. The legislature has plenary power of legislation
within the fields assigned to them, it may legislate prospectively D
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 constitutio futuris
formam imponere debet non praeteritis”, i.e. ‘a new law ought to E
regulate what is to follow, not the past’, contain a principle of
presumption of prospectivity of a statute. [Para 23][516-D-E]
“Principles of Statutory Interpretation” 14 th Edition,
in Chapter 6 by Justice G. P. Singh – relied on.
2.1 The sub-sections (2) and (3) were inserted in Section F
14A, Income Tax Act, 1961 by 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 amendments brought
by Finance Bill, 2006 will take effect from 01.04.2007. After
G
insertion of sub-section (2) and (3) in Section 14A by Finance
Bill, 2006, Circular dated 28.12.2006 was issued by the Central
Board of Direct Taxes. [Paras 28, 30][522-F-G; 523-F]
2.2 Income Tax Rules, 1962 were amended by notification
dated 24.03.2008 by which Rule 8D was inserted. The
H
504 SUPREME COURT REPORTS [2018] 1 S.C.R.
A methodology for determining amount of the expenditure in
addition to income not includable in total income was for the first
time prescribed by Rule 8D as was envisaged in Section 14A
sub-section (2) and sub-section (3). [Paras 21, 31][515-A; 523-
G-H]
B The Commissioner of Income Tax (Central – 1 New
Delhi) v. Vatika Township Pvt. Ltd. 2015 (1) SCC 1 :
[2014] 12 SCR 1037 – followed.
2.3 Explanatory memorandum issued with the Finance Bill,
2006 and the CBDT circular dated 28.12.2006, clearly indicates
C that department understood that sub-section (2) and sub-section
(3) was to be implemented with effect from assessment year 2007-
2008. Rule 8D prescribing the method was brought into statute
book with effect from 24.03.2008 to implement sub-section (2)
and sub-section (3) with effect from assessment year 2008-09, is
clear indicator of the fact that a new method for computing the
D expenditure was brought in by the rules which was to be utilized
for computing expenditure for the Assessment Year 2008-09 and
onwards. [Para 32][524-B-C]
3.1 When Section14A was inserted by Finance Act, 2001, it
was with retrospective effect with effect from 01.04.1962 whereas
E Finance Act, 2006, by which sub-section (2) and sub-section (3)
to Section 14A were inserted, it was with effect from 01.04.2006
which was mentioned in clause 1(2) of Finance Act, 2006. It is,
however, well settled that the mere date of enforcement of
statutory provisions does not conclude that the statute is
F 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. [Para 33][524-D-G]
3.2 Section 14A was inserted by Finance Act, 2001 and the
provisions were fully workable without there being any mechanism
G provided for computing the expenditure. Although Section 14A
was made effective from 01.04.1962 but Proviso was immediately
inserted by Finance Act, 2002, providing that Section 14A shall
not empower assessing officer either to reassess under Section
147 of the 1961 Act or pass an order enhancing the assessment
or reducing a refund already made or otherwise increasing the
H
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 505
MANAGER
liability of the assessees under Section 154 of the 1961 Act, for A
any assessment year beginning on or before 01.04.2001. Thus,
all concluded transactions prior to 01.04.2001 were made final
and not allowed to be re-opened. [Para 35][525-A-C]
4. Machinery provision of a taxing statute has to give effect
to its manifest purposes. But the applicability of the machinery B
provision whether it is prospective or retrospective depends on
the content and nature of the statutory scheme. [Para 43][529-B-
C]
Commissioner of Income Tax – III v. Calcutta Knitwears,
Ludhiana (2014) 6 SCC 444 – distinguished. C
5.1 Rule 8D was again amended by Income Tax (Fourteenth
Amendment) Rules, 2016 w.e.f. 02.06.2016, by which Rule 8D
sub-rule (2) was substituted by a new provision. The method for
determining the amount of expenditure brought in force w.e.f.
24.03.2008 has been given a go-bye and a new method has been D
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. [Paras 45, 46][530-E-H; 531-A-
B] E
5.2 The methodology as provided under Rule 8D was
neither a well-known nor well-settled mode of computation. The
new mode of computation was brought in place by Rule 8D. No
assessing Officer, even in his imagination could have applied the
methodology, which was brought in place by Rule 8D. There is F
no indication in Rule 8D to the effect that it was intended to apply
retrospectively. Applying the principles of statutory interpretation
for interpreting retrospectivity of a fiscal statute and looking into
the nature and purpose of sub-section (2) and sub-section (3) of
Section 14A as well as purpose and intent of Rule 8D coupled G
with the explanatory notes in the Finance Bill, 2006 and the
departmental understanding as reflected by Circular dated
28.12.2006, it is clear that Rule 8D was intended to operate
prospectively. It is held that Rule 8D is prospective and could
not have been applied to any assessment year prior to Assessment
H
506 SUPREME COURT REPORTS [2018] 1 S.C.R.
A Year 2008-09. [Paras 39, 48 and 50][526-F-G; 531-G-H; 532-E]
Godrej Boyce and Manufacturing Company Limited v.
Deputy Commissioner ofIncome Tax, Mumbai & Anr.
(2010) 328 ITR 81(Bom.)- approved.
Commissioner of Income Tax I, Ahmedabad v. Gold
B Coin Health Food Private Limited (2008) 9 SCC 622:
[2008] 12 SCR 179; Commissioner of Wealth Tax,
Meerut v. Sharvan Kumar Swarup & Sons (1994) 6 SCC
623 : [1994] 3 Suppl. SCR 750 – distinguished.
Govind Das and others v. the Income Tax officer and
C another (1976) 1 SCC 906 : [1976] 3 SCR 44; Jayam
and company v. Assistant Commissioner & Ors. (2016)
15 SCC 125 : [2016] 6 SCR 787 – relied on.
Godrej and Boyce Manufacturing Company Limited v.
Deputy Commissioner of Income Tax, Mumbai and
D Another (2017) 7 SCC 421; State of Jharkhand & Ors.
v. Shiv Karampal Sahu (2009) 11 SCC 453 – referred
to.
Case Law Reference
[1976] 3 SCR 44 relied on Para 25
E
[2014] 12 SCR 1037 followed Para 26
[2016] 6 SCR 787 relied on Para 27
[1994] 3 Suppl. SCR 750 distinguished Para 37
F [2008] 12 SCR 179 distinguished Para 40
(2014) 6 SCC 444 distinguished Para 42
(2009) 11 SCC 453 referred to Para 47
(2017) 7 SCC 421 referred to Para 49
G (2010) 328 ITR 81(Bom.) approved Para 49
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2165
of 2012.
From the Judgment and Order dated 12.09.2011 of the High Court
of Judicature at Bombay in ITA (L) No. 947 of 2011.
H
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 507
MANAGER
WITH A
C. A. Nos. 1429, 1430 -1432, 1433, 1434, 1435, 1436, 1437, 1438,
1439, 1440, 1441, 1442, 1443, 1444, 1445, 1446, 1460 and 1461 of 2018
C. A. No. 117, 118, 6727, 119, 116, 194, 114, 120, 121, 122, 128,
113, 126, 124, 129, 125, 127, 3355, 3359, 3781, 3358, 6294, 7892, 9251,
9252 and 14525 of 2015, B
C. A. No. 5101, 7395, 7394, 7797, 7426, 8195 and 8800 of 2012
C. A. No. 381, 3273, 1101, 6313, 6733, 6191, 8921, 6192, 7167,
8376, 7172, 7170, 9183, 8341, 7168, 8256, 7171, 7974, 8342, 7173, 8343,
8933, 8909, 9832, 9833 and 9184 of 2013
C. A. No. 8178, 8177, 3279, 5044, 5417 and 6019 of 2016, C
C. A. No. 4539 of 2017
K. Radhakrishnan, Yashank Adhyaru, S. K. Bagaria, Sr. Advs.
Rameshwar Prasad Goyal, Brajesh Kumar, Ms. Kavita Jha, Arijit Prasad,
Rupesh Kumar, D. L. Chidananda, Ms. Sadhna Sandhu, Ms. Gargi
Khanna, Ms. Rekha Pandey, Mrs. Anil Katiyar, H. R. Rao, Manish D
Pushkarna, Ritesh Kumar, Satyen Sethi, Arta Trana Panda, Rajat Navet,
Ms. Sanya Talwar, K. Pandit, Pradeep Kumar Bakshi, Mahesh Agarwal,
K. Ajeet, Ms. Parul Shukla, Rajesh Kumar, Sayaree Basu Malik, Raghav
Pandey, E. C. Agrawala, Kamal Sawhney, Prashant Meharchandani,
Shikhar Garg, Ms. Pooja Dhar, Ms. Vanita Bhargava, Rony O. John, E
Abhisaar Bairagi, Shikhar Srivastava, Sanjeev Kapoor, M/s. Khaitan &
Co., Rajiv Tyagi, Mihir Ashok Mody, Sudhanshu Sikka, M/s. K Ashar &
Co., Munawwar Naseem, Dr. Shashwat Bajpai, Sharad Agarwal,
V. N. Raghupathy, Ranjit B. Raut, Ms. Surbhi Kapoor, Mrs. Bina Gupta,
Syed Shahid Hussain Rizvi, N. A. Usmani, Salil Kapoor, Sumit
Lalchandani, Sanat Kapoor, Ms. Ananya Kapoor, Ms. Soumya Singh, F
Kislaya Parashar, Praveen Swarup, Ajay Aggarwal, Ms. Mallika Joshi,
Rajan Narain, S. Vasudevan, Saurabh Sood, Shashank S., Aditya
Bhattacharya, Victor Das, Ms. Apeksha Mehta, Punit Dutt Tyagi,
Dr. Rakesh Gupta, Ambhoj Kumar Sinha, Ms. Monika Ghai, B. S. Banthia,
Simran Mehta, Ms. Aruna Gupta, Naveen Kumar, Jagdish Kumar G
Chawla, Rustom B. Hathikhanawala, Bimal Roy Jad, Swami Nath,
N. G. Dev, Ms. Vithika Garg, Vijay Kumar, Ms. Vidushi Garg, Rajesh
Mahna, Bhargava V. Desai, S. Gowthaman, Ashok Mathur, Birendra
Kumar Mishra, Vivek Jain, Mrs. Shally Bhasin, Ajay Sharma, Chandra
Prakash, Aljo K. Joseph, Mayank Nagi, Tarun Singh, Shekhar Prit Jha,
Advs. for the appearing parties. H
508 SUPREME COURT REPORTS [2018] 1 S.C.R.
A The Judgment of the Court was delivered by
ASHOK BHUSHAN, J. 1. 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
B leading case relates only to Question No.2, which is to the following
effect:-
“Whether sub-section (2) and sub-section (3) of Section 14A
inserted with effect from 01.04.2007 will apply to all pending
assessments?
C
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
D proceedings in Civil Appeal No. 2165 of 2012.
FACTS
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
E 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.).
F The assessment year in issue is 2003-2004. 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 non-taxable dividend income. Accordingly,
G 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.
H
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 509
MANAGER [ASHOK BHUSHAN, J.]
5. The assessee filed an appeal, which was partly allowed by A
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
B
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 C
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 D
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 E
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 F
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 G
appeals.
“SUBMISSIONS”
9. Learned counsel for the appellant (revenue) submit that
provisions of Section 14A being clarificatory in nature and Rule 8D is a
H
510 SUPREME COURT REPORTS [2018] 1 S.C.R.
A procedural provision which provided only a machinery for the
implementation of sub-sections (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
co-terminus with the period of operation of the main charging provision.
The charging section i.e. Section 14A admittedly being retrospective,
B
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
C 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
D 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
E 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 sub-sections (2) and (3) of Section 14A clearly mention that the
aforesaid provisions were to be applicable from assessment year 2007-
F 2008 onwards. Hence, Rule 8D, which is framed to give effect to the
provisions of sub-sections (2) and (3) cannot operate from any date
prior to assessment year 2007-2008.
12. Shri Ajay Vohra, learned senior counsel appearing for assessee
submits that Rule 8D has been amended by Income Tax (14 th
G 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
H substituted w.e.f. 02.06.2016? The amendment made w.e.f. 02.06.2016
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 511
MANAGER [ASHOK BHUSHAN, J.]
reinforces that the methodology of computing the expenditure in relation A
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
B
reliance on various decisions of this Court, which shall be referred to
while considering the submissions in detail.
13. Shri S.S.H. Rizvi, learned counsel appearing for the assessee
in Civil Appeal arising out of SLP (C) 16185 of 2016 submits that Revenue
has already agreed before the ITAT that matter be remitted to Assessing
Officer for fresh decision in light of judgment of the Bombay High Court C
in Godrej and Boyce Manufacturing Company (supra), hence, it had
no jurisdiction to file an appeal before the High Court. He submits that
High Court has rightly dismissed the appeal of the Revenue, relying on
the judgment of the Bomabay High Court in Godrej and Boyce
Manufacturing Company (supra) after noticing the fact that no interim D
order was passed by this Court in Special Leave Petition filed against
the said judgment. It has been submitted by Shri Rizvi that no other
question arose in the appeal before the High Court hence the Revenue
has approached this Court by filing this Special Leave Petition without
any basis.
E
Relevant Statutory Provisions
14. Rule 8D has been framed to give effect to the provisions of
Section 14A sub-section (2) and (3) of the Income Tax Act, 1961
(hereinafter referred to as “the Act”). The statutory scheme as
delineated by Section 14A has to be understood before correctly
F
appreciating the nature and purport of Rule 8D. Section 14A was first
inserted by Finance Act, 2001 with retrospective effect w.e.f. 01.04.1962.
Section 14A as originally inserted reads as under:-
“14A. Expenditure incurred in relation to income not includible in
total income. -– For the purposes of computing the total income
under this Chapter, no deduction shall be allowed in respect of G
expenditure incurred by the assessee in relation to income which
does not form part of the total income under this Act.”
15. The purpose for which Section 14A was introduced was given
in the explanatory memorandum issued with the Finance Bill, 2001, which
reads a sunder:- H
512 SUPREME COURT REPORTS [2018] 1 S.C.R.
A “Certain incomes are not includible while computing the total
income as these are exempt under various provisions of the Act.
There have been cases where deductions have been claimed in
respect of such exempt income. This in effect means that the tax
incentive given by way of exemptions to certain categories of
income is being used to reduce also the tax payable on the non-
B
exempt income by debiting the expenses incurred to earn the
exempt income against taxable income. This is against the basic
principles of taxation whereby only the net income, i.e., gross
income minus the expenditure, is taxed. On the same analogy, the
exemption is also in respect of the net income. Expenses incurred
C can be allowed only to the extent they are relatable to the earning
of taxable income. It is proposed to insert a new section 14A so
as to clarify the intention of the Legislature since the inception of
the Income-tax Act, 1961, that no deduction shall be made in
respect of any expenditure incurred by the assessee in relation to
income which does not form part of the total income under the
D
Income-tax Act. The proposed amendment will take effect
retrospectively from 1st April, 1962 and will accordingly, apply in
relation to the assessment year 1962-1963 and subsequent
assessment years.”
16. Section 14A being retrospective in operation w.e.f. 01.04.1962,
E was being used by the Assessing Officers for reopening the assessments,
the Central Board of Direct Taxes came with a clarification vide Circular
No. 11 of 2001 dated 23.07.2001. Para 4 of the Circular stated as
follows:-
“The Board have considered this matter and hereby directs that
F the assessments where the proceedings have become final before
the first day of April, 2001 should not be re-opened under section
147 of the Act to disallow expenditure incurred to earn exempt
income by applying the provisions of newly inserted section 14A
of the Act.”
G 17. By Finance Act, 2002, a statutory provision was also inserted
by way of proviso to Section 14A. What was clarified by the Circular
have been statutorily engrafted in the proviso to the following effect:-
“Provided that nothing contained in this section shall empower
H
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 513
MANAGER [ASHOK BHUSHAN, J.]
the assessing officer either to reassess under section 147 or pass A
an order enhancing the assessment or reducing a refund already
made or otherwise increasing the liability of the assessee under
section 154, for any assessment year beginning on or before the
Ist day of April, 2001.”
18. By Finance Act, 2006, Section 14A was numbered as sub- B
section (1) and after sub-section (1) sub-sections (2) and (3) were
inserted w.e.f. 01.04.2007 to the following effect:-
“(2) The Assessing Officer shall determine the amount of
expenditure incurred in relation to such income which does not
form part of the total income under this Act in accordance with C
such method as may be prescribed, if the Assessing Officer, having
regard to the accounts of the assessee, is not satisfied with the
correctness of the claim of the assessee in respect of such
expenditure in relation to income which does not form part of the
total income under this Act.
D
(3) The provisions of sub-section (2) shall also apply in relation to
a case where an assessee claims that no expenditure has been
incurred by him in relation to income which does not form part of
the total income under this Act.”
19. Memorandum explaining the provisions in Finance Bill, 2006 E
in reference to the method for allocating expenditure in relation to exempt
income mentioned following:-
“Under the existing provisions of the said section, it has been
provided that for the purposes of computing the total income, no
deduction shall be allowed in respect of expenditure incurred by F
the assessee in relation to income which does not form part of the
total income under the Income-tax Act.
It is proposed to number the said section as sub-section (1) thereof
and to insert a new sub-section (2) in the said section so as to
provide that the Assessing Officer shall determine the amount of
G
expenditure incurred in relation to such income which does not
form part of the total income, in accordance with such method as
may be laid down by the Central Board of Direct Taxes by rules,
if the Assessing Officer having regard to the accounts of the
assessee, is not satisfied with the correctness of the claim of the
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514 SUPREME COURT REPORTS [2018] 1 S.C.R.
A assessee in respect of expenditure in relation to income which
does not form part of the total income. It is also proposed to provide
that provisions of sub-section (2) shall also apply in relation to a
case where an assessee claims that no expenditure has been
incurred by him in relation to income which does not form part of
the total income.
B
This amendment will take effect from 1st April, 2007 and will,
accordingly, apply in relation to the assessment year 2007-08 and
subsequent years.”
20. After the changes made in Section 14A by the Finance Act,
C 2006, a Circular No.14/2006 dated 28.12.2006 was issued, in which Para
11 of the Circular gave following explanation:-
“11.1 Section 14A of the Income-tax Act, 1961, provides that for
the purposes of computing the total income under Chapter-IV of
the said Act, no deduction shall be allowed in respect of expenditure
D incurred by the assessee in relation to income which does not
form part of the total income under the Income-tax Act. In the
existing provisions of section 14A, however, no method of
computing the expenditure incurred in relation to income which
does not form part of the total income has been provided for.
Consequently, there is considerable dispute between the taxpayers
E and the Department on the method of determining such
expenditure.
11.2 In view of the above, a new sub-section (2) has been inserted
in section 14A so as to provide that it would be mandatory for the
Assessing Officer to determine the amount of expenditure incurred
F in relation to such income which does not form part of the total
income in accordance with such method as may be prescribed.
However, the Assessing Officer shall follow the prescribed method
if, having regard to the accounts of the assessee, he is not satisfied
with the correctness of the claim of the assessee in respect of
G expenditure in relation to income which does not form part of the
total income. Provisions of sub-section (2), will also be applicable
in relation to a case where an assessee claims that no expenditure
has been incurred by him in relation to income which does not
form part of the total income.
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MANAGER [ASHOK BHUSHAN, J.]
11.3 Applicability - From assessment year 2007-08 onwards.” A
21. Income Tax Rules, 1962 were amended by notification dated
24.03.2008 by which Rule 8D was inserted to the following effect:-
“Method for determining amount of expenditure in relation
to income not includible in total income.
8D (1) Where the Assessing Officer, having regard to the accounts B
of the assessee of a previous year, is not satisfied with –
(a) the correctness of the claim of expenditure made by the
assessee; or
(b) the claim made by the assessee that no expenditure has
C
been incurred
in relation to income which does not form part of the total income
under the Act for such previous year, he shall determine the amount
of expenditure in relation to such income in accordance with the
provisions of sub-rule (2).
D
(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;
E
(ii) in a case where the assessee has incurred expenditure by
way of interest during the previous year which is not directly
attributable to any particular income or receipt, an amount
computed in accordance with the following formula, namely :—
B
F
AX
C
Where A= amount of expenditure by way of interest other than
the amount of interest included in clause (i) incurred during
the previous year; G
B= the average of value of investment, income from which
does not or shall not form part of the total income, as
appearing in the balance sheet of the assessee, on the first
day and the last day of the previous year ;
C= the average of total assets as appearing in the balance H
516 SUPREME COURT REPORTS [2018] 1 S.C.R.
A sheet of the assessee, on the first day and the last day of
the previous year;
(iii) an amount equal to one-half per cent of the average of
the value of investment, income from which does not or shall
not form part of the total income, as appearing in the balance
B sheet of the assessee, on the first day and the last day of the
previous year.”
3. For the purposes of this rule, the ‘total assets’ shall mean, total
assets as appearing in the balance sheet excluding the increase
on account of revaluation of assets but including the decrease on
C account of revaluation of assets.”
22. After setting out the legislative scheme of Section 14A and
Rule 8D, now, we proceed to consider the submissions raised by learned
counsel for the parties on the question in issue.
Important Principles of Statutory Interpretation
D
23. 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
E constitutio 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 prospectivity of a statute.
24. Justice G.P. Singh in “Principles of Statutory Interpretation”
(14th Edition, in Chapter 6) while dealing with operation of fiscal statute
F elaborates the principles of statutory interpretation in the following words:
“Fiscal legislation imposing liability is generally governed
by the normal presumption that it is not retrospective and it is
a cardinal principle of the tax law that the law to be applied
is that in force in the assessment year unless otherwise
G provided expressly or by necessary implication. The above
rule applies to the charging section and other substantive
provisions such as a provision imposing penalty and does
not apply to machinery or procedural provisions of a taxing
Act which are generally retrospective and apply even to
pending proceedings. But a procedural provision, as far as
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MANAGER [ASHOK BHUSHAN, J.]
possible, will not be so construed as to affect finality of tax A
assessment or to open up liability which had become barred.
Assessment creates a vested right and an assessee cannot be
subjected to reassessment unless a provision to that effect
inserted by amendment is either is either expressly or by
necessary implication retrospective. A provision which in terms
B
is retrospective and has the effect of opening up liability which
had become barred by lapse of time, will be subject to the
rule of strict construction. In the absence of a clear implication
such a legislation will not be given a greater retrospectivity
than is expressly mentioned; nor will it be construed to
authorize the Income-tax Authorities to commence proceedings C
which, before the new Act came into force, had by the expiry
of the period then provided become barred. But unambiguous
language must be given effect to, even if it results in reopening
of assessments which had become final after expiry of the
period earlier provided for reopening them. There is no fixed
D
formula for the expression of legislative intent to give
retrospectivity to a taxation enactment......”
25. A three-Judge Bench of this court in 1976 (1) SCC 906,
Govind Das and others Versus the Income Tax officer and another,
noticing the settled rules of interpretation laid down following in paragraph
11: E
“11. Now it is a well settled rule of interpretation hallowed by
time and sanctified by judicial decisions that, unless the terms
of a statute expressly so provide or necessarily require it,
retrospective operation should not be given to a statute so as
to take away or impair an existing right or create a new F
obligation or impose a new liability otherwise than as regards
matters of procedure. The general rule as stated by Halsbury
in Vol. 36 of the Laws of England (3rd Edn.) and reiterated in
several decisions of this Court as well as English courts is
that G
“all statutes other than those which are merely declaratory
or which relate only to matters of procedure or of evidence
are prima facie prospective”
and retrospective operation should not be given to a statute
so as to affect, alter or destroy an existing right or create H
518 SUPREME COURT REPORTS [2018] 1 S.C.R.
A a new liability or obligation unless that effect cannot be
avoided without doing violence to the language of the
enactment. If the enactment is expressed in language which
is fairly capable of either interpretation, it ought to be
construed as prospective only. If we apply this principle
of interpretation, it is clear that sub-section (6) of Section
B
171 applies only to a situation where the assessment of a
Hindu undivided family is completed under Section 143 or
Section 144 of the new Act. It can have no application
where the assessment of a Hindu undivided family is
completed under the corresponding provisions of the old
C Act. Such a case would be governed by Section 25-A of
the old Act which does not impose any personal liability
on the members in case of partial partition and to construe
sub-section (6) of Section 171 as applicable in such a case
with consequential effect of casting of the members personal
liability which did not exist under Section 25-A, would be
D
to give retrospective operation to sub-section (6) of Section
171 which is not warranted either by the express language
of that provision or by necessary implication. Sub-section
(6) of Section 171 can be given full effect by interpreting
it as applicable only in a case where the assessment of a
E Hindu undivided family is made under Section 143 or
Section 144 of the new Act. We cannot, therefore,
consistently with the rule of interpretation which denies
retrospective operation to a statute which has the effect of
creating or imposing a new obligation or liability, construe
sub-section (6) of Section 171 as embracing a case where
F
assessment of a Hindu undivided family is made under the
provisions of the old Act. Here in the present case, the
assessments of the Hindu undivided family for Assessment
Years 1950-51 to 1956-57 were completed in accordance
with the provisions of the old Act which included Section
G 25-A and the Income Tax Officer was, therefore, not entitled
to avail of the provision enacted in sub-section (6) read
with sub-section (7) of Section 171 of the new Act for the
purpose of recovering the tax or any part thereof
personally from any members of the joint family including
the petitioners.”
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MANAGER [ASHOK BHUSHAN, J.]
26. A Constitution Bench of this court speaking through one of us, A
Dr. Justice A.K.Sikri, in the case of The Commissioner of Income
Tax(Central – 1 New Delhi) Vs. Vatika Township Pvt. Ltd., 2015 (1)
SCC 1, while considering as to whether Proviso inserted in Section 113
of Income Tax Act w.e.f. 01.06.2002 is prospective or clarificatory /
retrospective noticed the general principles concerning retrospectivity.
B
Following was laid down by the Constitution Bench in Paras 28, 29 and
33:
“28. Of the various rules guiding how legislation has to be
interpreted, one established rule is that unless a contrary
intention appears, a legislation is presumed not to be intended
to have a retrospective operation. The idea behind the rule is C
that a current law should govern current activities. Law passed
today cannot apply to the events of the past. If we do something
today, we do it keeping in view the law of today and in force
and not tomorrow’s backward adjustment of it. Our belief in
the nature of the law is founded on the bedrock that every D
human being is entitled to arrange his affairs by relying on
the existing law and should not find that his plans have been
retrospectively upset. This principle of law is known as lex
prospicit non respicit: law looks forward not backward. As
was observed in Phillips v. Eyre6, a retrospective legislation
is contrary to the general principle that legislation by which E
the conduct of mankind is to be regulated when introduced
for the first time to deal with future acts ought not to change
the character of past transactions carried on upon the faith
of the then existing law.
29. The obvious basis of the principle against retrospectivity F
is the principle of “fairness”, which must be the basis of every
legal rule as was observed in L’Office Cherifien des
Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd.7 Thus,
legislations which modified accrued rights or which impose
obligations or impose new duties or attach a new disability G
have to be treated as prospective unless the legislative intent
is clearly to give the enactment a retrospective effect; unless
the legislation is for purpose of supplying an obvious omission
in a former legislation or to explain a former legislation. We
need not note the cornucopia of case law available on the
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520 SUPREME COURT REPORTS [2018] 1 S.C.R.
A subject because aforesaid legal position clearly emerges from
the various decisions and this legal position was conceded
by the counsel for the parties. In any case, we shall refer to
few judgments containing this dicta, a little later.
33. A Constitution Bench of this Court in Keshavlal Jethalal
B Shah v. Mohanlal Bhagwandas, while considering the nature
of amendment to Section 29(2) of the Bombay Rents, Hotel
and Lodging House Rates Control Act as amended by Gujarat
Act 18 of 1965, observed as follows: (AIR p. 1339, para 8)
“8. … The amending clause does not seek to explain any
C pre-existing legislation which was ambiguous or defective.
The power of the High Court to entertain a petition for
exercising revisional jurisdiction was before the amendment
derived from Section 115 of the Code of Civil Procedure,
and the legislature has by the amending Act not attempted
to explain the meaning of that provision. An explanatory
D Act is generally passed to supply an obvious omission or
to clear up doubts as to the meaning of the previous Act.”
27. A two-Judge Bench, speaking through one of us, Dr. Justice
A. K. Sikri in Jayam and company Vs. Assistant Commissioner &
Ors., (2016) 15 SCC 125, again reiterated the broad legal principles
E while testing a retrospective statute in Paragraphs 14 and 18 which is to
the following effect:
“14. With this, let us advert to the issue on retrospectivity. No
doubt, when it comes to fiscal legislation, the legislature has
power to make the provision retrospectively. In R.C. Tobacco
F (P) Ltd. v. Union of India, this Court stated broad legal
principles while testing a retrospective statute, in the following
manner: (SCC pp. 737-38 & 740, paras 21-22 & 28)
“(i) A law cannot be held to be unreasonable merely
because it operates retrospectively;
G (ii) The unreasonability must lie in some other
additional factors;
(iii) The retrospective operation of a fiscal statute
wouldhave to be found to be unduly oppressive and
confiscatory before it can be held to be unreasonable as
H to violate constitutional norms;
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 521
MANAGER [ASHOK BHUSHAN, J.]
(iv) Where taxing statute is plainly discriminatory A
or provides no procedural machinery for assessment and
levy of tax or that is confiscatory, courts will be justified
in striking down the impugned statute as unconstitutional;
(v) The other factors being period of retrospectivity
and degree of unforeseen or unforeseeable financial B
burden imposed for the past period;
(vi) Length of time is not by itself decisive to affect
retrospectivity.” (Jayam and Co. case1, SCC Online Mad
para 85)
18. The entire gamut of retrospective operation of fiscal C
statutes was revisited by this Court in a Constitution Bench
judgment in CIT v. Vatika Township (P) Ltd. in the following
manner: (SCC p. 24, paras 33-35)
“33. A Constitution Bench of this Court in Keshavlal Jethalal
Shah v. Mohanlal Bhagwandas, while considering the nature D
of amendment to Section 29(2) of the Bombay Rents, Hotel
and Lodging House Rates Control Act as amended by Gujarat
Act 18 of 1965, observed as follows: (AIR p. 1339, para 8)
‘8. … The amending clause does not seek to explain any
pre-existing legislation which was ambiguous or defective. E
The power of the High Court to entertain a petition for
exercising revisional jurisdiction was before the amendment
derived from Section 115 of the Code of Civil Procedure,
and the legislature has by the amending Act not attempted
to explain the meaning of that provision. An explanatory F
Act is generally passed to supply an obvious omission or
to clear up doubts as to the meaning of the previous Act.’
34. It would also be pertinent to mention that assessment
creates a vested right and an assessee cannot be subjected to
reassessment unless a provision to that effect inserted by
G
amendment is either expressly or by necessary implication
retrospective. (See CED v. M.A. Merchant.)
35. We would also like to reproduce hereunder the following
observations made by this Court in Govind Das v. ITO, while
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522 SUPREME COURT REPORTS [2018] 1 S.C.R.
A holding Section 171(6) of the Income Tax Act to be prospective
and inapplicable for any assessment year prior to 1-4-1962,
the date on which the Income Tax Act came into force: (SCC
p. 914, para 11)
‘11. Now it is a well-settled rule of interpretation hallowed by
B time and sanctified by judicial decisions that, unless the terms
of a statute expressly so provide or necessarily require it,
retrospective operation should not be given to a statute so as
to take away or impair an existing right or create a new
obligation or impose a new liability otherwise than as regards
matters of procedure. The general rule as stated by Halsbury
C in Vol. 36 of the Laws of England (3rd Edn.) and reiterated in
several decisions of this Court as well as English courts is
that
“all statutes other than those which are merely declaratory
or which relate only to matters of procedure or of evidence
D are prima facie prospective and retrospective operation should
not be given to a statute so as to affect, alter or destroy an
existing right or create a new liability or obligation unless
that effect cannot be avoided without doing violence to the
language of the enactment. If the enactment is expressed in
E language which is fairly capable of either interpretation, it
ought to be construed as prospective only.”’”
28. The sub-section (2) and sub-section (3) were inserted in Section
14A by Finance Act, 2006. The memorandum explaining the provision in
Finance Bill, 2006, in reference to the methods for allocating expenditure
F in relation to exempt income as extracted above clearly mentions that
amendments brought by Finance Bill, 2006 will take effect from
01.04.2007. The last paragraph of memorandum was to the following
effect:
“this amendment will take effect from 01.04.2007 and will
G accordingly, apply in relation to the assessment year 2007-08 and
subsequent years”
29. The Constitution Bench of this court in the Commissioner of
Income Tax and ors. Vs. Vatika Township Pvt. Ltd., (Supra), has
taken into consideration the notes of clause appended to the Finance Bill
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CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 523
MANAGER [ASHOK BHUSHAN, J.]
to decipher the nature of the legislative scheme. In paragraph 42.1, A
Constitution Bench stated as follows:
“42.1. “Notes on Clauses” appended to the Finance Bill, 2002
while proposing insertion of proviso categorically states that
“this amendment will take effect from 1-6-2002”. These
become epigraphic** words, when seen in contradistinction B
to other amendments specifically stating those to be
clarificatory or retrospective depicting clear intention of the
legislature. It can be seen from the same Notes that a few
other amendments in the Income Tax Act were made by the
same Finance Act specifically making those amendments
retrospective. For example, Clause 40 seeks to amend Section C
92-F. Clause (iii-a) of Section 92-F is amended “so as to
clarify that the activities mentioned in the said clause include
the carrying out of any work in pursuance of a contract”
(emphasis supplied). This amendment takes effect
retrospectively from 1-4-2002. Various other amendments also D
take place retrospectively. The Notes on Clauses show that
the legislature is fully aware of three concepts:
(i) prospective amendment with effect from a fixed date;
(ii) retrospective amendment with effect from a fixed anterior
date; and E
(iii) clarificatory amendments which are retrospective in
nature.”
30. It is also relevant to know as to how the statutory provisions
of Section 14A sub-section (2) and sub-section (3), Rule 8D was F
understood by the Income Tax department itself. After insertion of sub-
section (2) and sub-section (3) in Section 14A by Finance Bill, 2006,
circular dated 28.12.2006 was issued by the department wherein
paragraph 11.3, following was stated:
“11.3. Applicability- from assessment year 2007-2008 onwards.”
G
31. The methodology for determining amount of the expenditure
in addition to income not includable in total income was for the first time
prescribed by Rule 8D as was envisaged in Section 14A sub-section (2)
and sub-section (3). It is also relevant to notice that Constitution Bench
in the Commissioner of Income Tax Vs. Vatika Township Pvt. Ltd.,
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524 SUPREME COURT REPORTS [2018] 1 S.C.R.
A has also referred to and relied the CBDT circular to find out the
understanding of the Central Board of Direct Tax itself in context of
Provision which was in issue in the above case.
32. Explanatory memorandum issued with the Finance Bill, 2006
and the CBDT circular dated 28.12.2006, thus, clearly indicates that
B department understood that sub-section (2) and sub-section (3) was to
be implemented with effect from assessment year 2007-2008. The Rule
8D prescribing the method was brought into statute book with effect
from 24.03.2008 to implement sub-section (2) and sub-section (3) with
effect from assessment year 2008-2009, is clear indicator of the fact
that a new method for computing the expenditure was brought in by the
C rules which was to be utilized for computing expenditure for the
Assessment Year 2008-2009 and onwards.
33. When Section 14A was inserted by Finance Act, 2001, it was
with retrospective effect with effect from 01.04.1962 where as Finance
Act, 2006, by which sub-section (2) and sub-section (3) to Section 14A
D were inserted, it was with effect from 01.04.2006 which was mentioned
in clause 1(2) of Finance Act, 2006 which was to the following effect:
“1(2). Save as otherwise provided in this Act, Sections 2 to 57
shall be deemed to have come into force on the 1st day of April,
2006.”
E
Rule 8D which was inserted by notification dated 24.03.2008.
Rule 1 sub-rule (2) provides as under:
“1. (1) These rules may be called the Income-tax (Fifth
Amendment) Rules, 2008.
F (2). They shall come into force from date of their publication in
the Official Gazette.”
It is, however, well settled 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
G out the legislative scheme and the nature, effect and consequence of the
statute.
34. The submissions which have been much pressed by the counsel
for revenue is that the Section 14A of the Act being clarificatory in
nature having retrospective operation, Rule 8D, which is a machinery
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CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 525
MANAGER [ASHOK BHUSHAN, J.]
provisions have also to be held to be retrospective to make machinery A
provisions workable.
35. It is to be noted that Section 14A was inserted by Finance
Act, 2001 and the provisions were fully workable without their being
any mechanism provided for computing the expenditure. Although Section
14A was made effective from 01.04.1962 but Proviso was immediately B
inserted by Finance Act, 2002, providing that Section 14A shall not
empower assessing officer either to reassess under Section 147 or pass
an order enhancing the assessment or reducing a refund already made
or otherwise increasing the liability of the assessees under Section 154,
for any assessment year beginning on or before 01.04.2001. Thus, all
concluded transactions prior to 01.04.2001 were made final and not C
allowed to be re-opened.
36. The memorandum of explanation explaining the provisions of
Finance Act, 2006 has clearly mentioned that Section 14 sub-section (2)
and sub-section (3) shall be effective with effect from the assessment
year 2006-07 alone which is another indicator that provision was intended D
to operate prospectively.
37. Learned counsel for the appellant have placed heavy reliance
on a three-Judge Bench Judgment of this Court in Commissioner of
Wealth Tax, Meerut versus Sharvan Kumar Swarup & Sons, (1994)
6 SCC 623. This Court in the above case had to interpret Rule 1-BB, E
inserted in Wealth Tax, 1957 w.e.f. 01.04.1979. For Assessment Year
1977-78 and 1978-79 assessment order was passed on 08.02.1983 by
which time Rule 1 BB had been introduced in the Rule. The assessee
contended that properties to be valued applying the Rule 1-BB. The
claim was rejected and Assessing Officer had valued the immovable
F
property independently of Rule 1-BB.
38. Appeal preferred by assessee was allowed. Appeal by the
Revenue before the Income Tax Appellate Tribunal was also dismissed.
High Court also answered the question against the Revenue, which was
taken in appeal before this Court. This Court, after noticing the various
principles of “statutory interpretation” held that “procedural law” G
generally speaking is applicable to pending cases. Interpreting Rule 1-
BB following was held in para 23 and 25:
“23. We may now turn to the scope and content of Rule 1-BB.
The said rule merely provides a choice amongst well-known
and well-settled modes of valuation. Even in the absence of H
526 SUPREME COURT REPORTS [2018] 1 S.C.R.
A Rule 1-BB it would not have have been objectionable, nor
would there be any legal impediment, to adopt the mode of
valuation embodied in Rule 1-BB, namely, the method of
capitalisation of income on a number of years’ purchase
value. The rule was intended to impart uniformity in valuations
and to avoid vagaries and disparities resulting from
B
application of different modes of valuation in different cases
where the nature of the property is similar.”
25. On a consideration of the matter we are persuaded to the
view that Rule 1-BB is essentially a rule of evidence as to the
choice of one of the well accepted methods of valuation in
C respect of certain kinds of properties with a view to achieving
uniformity in valuation and avoiding disparate valuations
resulting from application of different methods of valuation
respecting properties of a similar nature and character. The
view taken by the High Courts, in our opinion, cannot be
D said to be erroneous.”
39. This Court in the above case held that Rule 1-BB shall be
applicable even prior to the enforcement of the rule holding that the said
rule merely provides a choice amongst well-known and well-settled
modes of valuation. It was held that even in the absence of Rule 1-BB,
E it would not have been objectionable to adopt the mode of valuation
embodied in Rule 1-BB, namely, the mode of capitalisation of income on
a number of years purchased value. The said judgment is, clearly,
distinguishable in context of issue which has arisen before us. In the
present case, methodology as provided under Rule 8D was neither a
well-known nor well-settled mode of computation. The new mode of
F computation was brought in place by Rule 8D. No Assessing Officer,
even in his imagination could have applied the methodology, which was
brought in place by Rule 8D. Thus, retrospective operation of Rule 8D
cannot be accepted on the strength of law laid down by this Court in the
above case.
G 40. The next judgment relied by the Revenue is Commissioner
of Income Tax I, Ahmedabad versus Gold Coin Health Food Private
Limited, (2008) 9 SCC 622. In the above case, this Court considered
the amendments made by the Finance Act, 2002 to Section 271(1)(c)(iii)
of the Act. This Court held that the Parliament clarified the position by
changing the expression “any” by “if any”, which was not a substantive
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MANAGER [ASHOK BHUSHAN, J.]
amendment creating penalty for the first time. The amendment as A
specifically noted in the notes of “Clauses” was clarificatory in nature.
In para 5 following was laid down:
“5. It is pointed out that prior to the amendment, Section
271(1)(c)(iii) read as follows:
“271.(1)(c)(iii) in the cases referred to in clause (c), in addition B
to any tax payable by him, a sum which shall not be less than,
but which shall not exceed twice, the amount of the income in
respect of which the particulars have been concealed or
inaccurate particulars have been furnished.”
It was submitted that bare reading of the provision made the C
position clear that it was not necessary that income tax must
be payable by the assessee as sine qua non for imposition of
penalty. The word “any” made the position clear that the
penalty was in addition to any tax which may be paid by the
assessee. Therefore, even if no tax was payable, the penalty D
was leviable. It is in that context submitted that even prior to
the amendment it could not be read to mean that if no tax was
payable by the assessee because of filing a return disclosing
loss, the assessee is not liable to pay penalty even if the
assessee concealed and/or furnished inaccurate particulars.
Because some High Courts took the contradictory view, E
Parliament clarified the position by changing the expression
“any’ by “if any”. This was not a substantive amendment which
created a penalty for the first time. The amendment by the
Finance Act as specifically noted in the Notes on Clauses
makes the position clear that the amendment was clarificatory F
in nature and would apply to all assessments even prior to
Assessment Year 2003-04.”
41. The three-Judge 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 three-Judge Bench, further G
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
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528 SUPREME COURT REPORTS [2018] 1 S.C.R.
A concerned. It may also include carried-forward 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.”
B The three-Judge 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
C 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.
D 42. The Revenue has also relied on the judgment of this Court in
Commissioner of Income Tax-III 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
E 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
F 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
G 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
H
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 529
MANAGER [ASHOK BHUSHAN, J.]
illustration that since charge made by the legislator in A
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 taxing statute has to give effect to its manifest purposes. B
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.
C
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 D
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. E
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 F
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 G
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
H
530 SUPREME COURT REPORTS [2018] 1 S.C.R.
A 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
B
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)
C (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
D (iii) the year in which the block assessment proceedings
under Section 158-BC 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,
E by which Rule 8D sub-rule (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:-
F
(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
G 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.]
H
CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITS 531
MANAGER [ASHOK BHUSHAN, J.]
46. The method for determining the amount of expenditure brought A
in force w.e.f. 24.03.2008 has been given a go-bye 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
B
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 well-settled 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. C
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 7-5-2003 was given a prospective effect. The father of D
the respondent died on 19-5-2000. There is nothing to show
that even Circular dated 9-8-2000 had been given
retrospective effect. In any view of the matter, as the State of
Jharkhand in the Circular Letter dated 7-5-2003 adopted the
earlier circular letters issued by the State of Bihar only in E
respect of cases where death had occurred after 15-10-2000
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.” F
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 G
nature and purpose of sub-section (2) and sub-section (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. H
532 SUPREME COURT REPORTS [2018] 1 S.C.R.
A 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, (2010) 328 ITR 81 (Bom.), where
the Division Bench of the Bombay High court after elaborately
considering the principles to determine the prospectivity or retrospectivity
B
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
vide its judgment reported in Godrej and Boyce Manufacturing
Company Limited Vs. Deputy Commissioner of Income Tax,
C 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
D
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,
E the Rule 8D is prospective in operation and could not have been applied
to any assessment year prior to Assessment Year 2008-09.
51. In result, all the appeals filed by the Revenue are dismissed.
F Divya Pandey Appeals of Revenue dismissed.
G
H
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