2018 (2) TMI 115 - SC - Income Tax

Rule 8D of Income Tax Rules applies prospectively only, cannot be used for pre-2008-09 assessments

Commissioner of Income Tax 5 Mumbai Versus M/s. Essar Teleholdings Ltd. Through Its Manager

The SC held that Rule 8D of the Income Tax Rules, introduced to determine expenditure related to exempt income under Section 14A, operates prospectively ... Effect of section 14A amendment - applicability of Rule 8D - Prospective or Retrospective - Method for determining amount of expenditure in relation to income not includible in total income - Principles of Statutory Interpretation - Maxim “nova constitutio futuris formam imponere debet non praeteritis” - Whether sub-section (2) and sub-section (3) of Section 14A inserted with effect from 01.04.2007 will apply to all pending assessments? - Held that:- 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, we are of the considered opinion that Rule 8D was intended to operate prospectively. Rule 8D is prospective in operation and could not have been applied to any assessment year prior to Assessment Year 2008-09. - Decided against revenue Issues Involved:1. Applicability of Section 14A sub-sections (2) and (3) to all pending assessments.2. Retrospective applicability of Rule 8D.Detailed Analysis:1. Applicability of Section 14A sub-sections (2) and (3) to all pending assessments:The Court examined whether Section 14A sub-sections (2) and (3), inserted with effect from 01.04.2007, would apply to all pending assessments. The Court noted that Section 14A was first inserted by the Finance Act, 2001, with retrospective effect from 01.04.1962. However, sub-sections (2) and (3) were introduced by the Finance Act, 2006, effective from 01.04.2007. The explanatory memorandum and the CBDT Circular dated 28.12.2006 clarified that these provisions would apply from the assessment year 2007-2008 onwards. Thus, the Court concluded that sub-sections (2) and (3) of Section 14A were intended to operate prospectively and not retrospectively.2. Retrospective applicability of Rule 8D:The Court addressed whether Rule 8D, which prescribes the method for determining the amount of expenditure in relation to income not includible in total income, is retrospective. The Court noted that Rule 8D was inserted by notification dated 24.03.2008 and came into force from the date of its publication in the Official Gazette. The Court emphasized that fiscal legislation imposing liability is generally not retrospective unless expressly stated. The Court referred to the legislative intent, explanatory memorandum, and CBDT Circular, which indicated that Rule 8D was to apply prospectively from the assessment year 2008-2009 onwards.The Court also distinguished the present case from precedents cited by the Revenue, such as Commissioner of Wealth Tax, Meerut Vs. Sharvan Kumar Swarup & Sons and Commissioner of Income Tax I, Ahmedabad Vs. Gold Coin Health Food Private Limited, which dealt with different contexts and provisions. The Court reiterated that subordinate legislation, like Rule 8D, is ordinarily prospective unless clearly indicated otherwise.The Court concluded that Rule 8D was intended to operate prospectively, and its retrospective application would create conflicts with subsequent amendments, such as the Income Tax (14th Amendment) Rules, 2016. Therefore, Rule 8D could not be applied to any assessment year prior to the assessment year 2008-2009.Conclusion:The Supreme Court upheld the Bombay High Court's judgment, affirming that Rule 8D is prospective in operation and could not be applied retrospectively to assessments before the assessment year 2008-2009. All appeals filed by the Revenue were dismissed.