# COMMISSIONER OF INCOME TAX 5 MUMBAI v. M/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER

- **Citation:** [2018] 1 S.C.R. 502
- **Court:** Supreme Court of India
- **Decided:** 2018-01-31
- **Case number:** Civil Appeal No. 2165 of 2012
- **Bench:** A. K. Sikri, Ashok Bhushan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-5-mumbai-v-m-s-essar-teleholdings-ltd-through-its-32579
- **Pages:** 31

## Headnote

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 -
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
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
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
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
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
- Circular No. 14/2006 dtd. 28.12.2006.
[2018] 1 S.C.R. 502
502
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503
Interpretation of Statutes - Nature of operation - Prospective
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.
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
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
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
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" 14th Edition,
in Chapter 6 by Justice G. P. Singh - relied on.
2.1 The sub-sections (2) and (3) were inserted in Section
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
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 o

## Text

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SUPREME COURT REPORTS
[2018] 1 S.C.R.
COMMISSIONER OF INCOME TAX 5 MUMBAI
v.
M/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER
(Civil Appeal No. 2165 of 2012)
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 -
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
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
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
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
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
- Circular No. 14/2006 dtd. 28.12.2006.
[2018] 1 S.C.R. 502
502
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Interpretation of Statutes - Nature of operation - Prospective
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.
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
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
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
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" 14th Edition,
in Chapter 6 by Justice G. P. Singh - relied on.
2.1 The sub-sections (2) and (3) were inserted in Section
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
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
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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; 523G-H]
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
that department understood that sub-section (2) and sub-section
(3) was to be implemented with effect from assessment year 20072008. 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
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
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
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
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
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liability of the assessees under Section 154 of the 1961 Act, 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 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
provision whether it is prospective or retrospective depends on
the content and nature of the statutory scheme. [Para 43][529-BC]
Commissioner of Income Tax - III v. Calcutta Knitwears,
Ludhiana (2014) 6 SCC 444 - distinguished.
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
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-AB]
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
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
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
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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
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
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
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
[2014] 12 SCR 1037
followed
Para 26
[2016] 6 SCR 787
relied on
Para 27
[1994] 3 Suppl. SCR 750 distinguished Para 37
[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
(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.
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WITH
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,
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. 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
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,
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,
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
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.
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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
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?
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.
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
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 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,
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.
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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.
"SUBMISSIONS"
9. Learned counsel for the appellant (revenue) submit that
provisions of Section 14A being clarificatory in nature and Rule 8D is a
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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,
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 sub-sections (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 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 (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
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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.
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
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
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.
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
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
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:-
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"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 nonexempt 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
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
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,
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
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."
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
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the 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 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 subsection (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
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.
(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
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
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
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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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.
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,
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
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
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
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
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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11.3 Applicability - From assessment year 2007-08 onwards."
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
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
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).
(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;
(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
 A X
 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;
 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
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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
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
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
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
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
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
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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possible, will not be so construed as to affect finality of tax
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
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
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
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:
"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
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
"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
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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
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
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
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
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
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
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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26. A Constitution Bench of this court speaking through one of us,
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.
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
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
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
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
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
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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