TaxTMI 
TaxTMI 
2010 (8) TMI 77
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....enables 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 the method that may be prescribed by the Rules made under the Act if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, having regard to the accounts of the assessee. By subsection (3), the provisions of subsection (2) are also to apply to a situation in which the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the Act. Section 14A was introduced by an amendment to the Finance Act of 2001 with retrospective effect from 1 April 1962. Subsections (2) and (3) were inserted by the Finance Act of 2006 with effect from 1 April 2007. Rule 8D of the Income Tax Rules prescribes the method for determining the expenditure incurred in relation to income which does not form part of the total income, where the Assessing Officer is not satisfied with the claim of the assessee. Rule 8D was notified in the Official Gazette of 24 March 2008. By Section 10(33) - as it stood during Assessment Year 2002-03 income by way ....
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....sallowance under Section 14A of the Act to Respondent No.1; (C) Whether the Tribunal erred in directing Respondent No.1 to apply Rule 8D of the Rules for computing the amount of disallowance under Section 14A of the Act." The assessee has, in addition, filed a Petition under Article 226 of the Constitution in order to challenge the constitutional validity of the provisions of Section 14A and of Rule 8D. Notice was issued to the Attorney General of India. Rule shall issue on the petition. In view of the importance of the question involved, Counsel for the Assessee and the Additional Solicitor General of India have agreed to the final disposal of the appeal and the Petition at this stage. 4. Broadly speaking, the submissions which have been urged on behalf of the assessee can be classified under the following heads: (i) Section 14A cannot be invoked in respect of dividend income from shares and mutual fund income for the reason that for the provision to be attracted, income must be exempt from tax or must be tax free which it has been urged, is not the case; (ii) Even if a literal interpretation of Section 14A suggests that the provision applies becau....
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....h income was exempt under Section 10(33) and it had disposed of some of its investments at a substantial profit. 6. The Assessing Officer observed that in the common pool of funds, it was difficult to ascertain whether investments had been made out of internal accruals or from borrowed funds. The Assessing Officer was of the view that if the assessee had not made investments in these securities, it would not have been required to borrow funds to that extent and consequently, the interest burden could have been reduced. On this basis, the Assessing Officer concluded that a part of the interest payment pertained to funds utilized for the purpose of investment in shares. The interest charged to the profit and loss account of Rs. 51.71 crores was bifurcated in the proportion between investments attributable to dividend receipts (Rs. 125.54 crores) to the total assets of the assessee (Rs. 938.11 crores). On this basis, the interest attributable to dividend receipts was computed at Rs. 6.92 crores which was disallowed. 7, In appeal, the assessee admitted that the exemption under Section 10(33) was to be allowed only on net dividend income. The assessee, however, contended that it w....
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....imited,{82 ITR 452} and in Rajastan State Warehousing Corporation vs. C.I.T.[242 ITR 450] In the former case, managing agency commission though partly relatable to earning agricultural income was permitted in its entirety as a deduction from taxable income and in the latter case, expenditure was allowed, even though relatable to exempt warehousing income as well as the taxable interest and other income; (ii) Dividend income and income from mutual funds cannot be regarded as exempt income. Tax on dividends declared, distributed or paid by the Company is imposed under Section 115O and similar is the position of mutual funds under Section 115R. Hence, when Section 10(33) provides that such income shall not be included as income of the shareholder/Unit holder, it does not mean that this is exempt income or income which is not charged to tax; (iii) Applying Heydon's rule of interpreting statutes and considering the object of inserting Section 14A, the phrase "does not form part of the total income" should be read as equivalent to exempt income; (iv) Dividend from shares or income from units of mutual funds are not exempt income as they are charged to tax under Sections 115O and 115R....
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....hich is exempt from taxation under Section 14(3) was held to be that proportion which the capital of the society used for the purpose of business bears to the total working capital. 12. A Division Bench of this Court presided over by Chief Justice M.C.Chagla, in the Broach Cooperative Bank Ltd. vs. Commissioner of Income Tax{(1949) Vol.II B.L.R. 718}, upheld the application of the principle of apportionment by the Tribunal. While construing the first proviso to Section 8 of the Income Tax Act, 1922, the Division Bench held that it applied only to securities which are not tax free and, therefore, the only right of the assessee was to claim deduction with regard to interest on monies borrowed by him where he utilized those monies in investing them in securities on which he has got to pay tax, but if the assessee used money borrowed by him in investment of tax free securities, he could not claim a deduction given to him under the first proviso. 13. In order to consider the merits of the submissions which have been urged on behalf of the assessee, it would be necessary to advert to the background underlying the enactment of Section 14A. 14. In C.I.T. vs. Indian Bank Limited,{A....
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....cluding expenditure laid out or expended wholly and exclusively for the purpose of business. The allowance claimed was held to have been laid out or expended for the purpose of the business of the assessee and the fact that the income arising from a part of the business was not assessable to tax was held not to be a relevant circumstance. 16. In Waterfall Estate Ltd. vs. C.I.T.,{(1996) 8 SCC 509} a finding of fact was entered by the Tribunal that the coffee curing works and estate of the assessee constituted separate and distinct activities. On this basis, the Supreme Court held that the decision in Maharashtra Sugar was distinguishable. 17. In a subsequent decision in Rajasthan State Warehousing Corporation vs. C.I.T.{2000 (109) Taxman 145}, a disallowance was effected by the Assessing Officer of such part of the expenditure which was allocable to exempt warehousing income. The Tribunal and the High Court confirmed the disallowance. Allowing the appeal, the Supreme Court held as follows: "(i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head, whether or not computation under each....
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....the total income under the Act. The Memorandum explaining the provisions of the Finance Bill of 2001 provided the following rationale for the insertion of Section 14A: "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 re....
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....lar 14 of 2001. 22. Consequent upon the enactment of Section 14A, the position as it has emerged in law is that no deduction can be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Section 14A, has the effect of broadening or widening the earlier position. The consequence of the insertion of Section 14A has been dealt with in a judgment of the Supreme Court in C.I.T. vs. Walfort Share and Stock Private Limited, delivered on 6 July 2010.{Civil Appeal 4927 of 2010}. In Walfort, the assessee who was a member of the Stock Exchange, purchased units of a Mutual Fund on 24 March 2000 upon which it became entitled to a dividend of Rs.1.82 crores. As a result of a payout of the dividend, the NAV of the mutual fund which was Rs.17.23 per unit on 24 March 2000, stood reduced to Rs.13.23 per unit on 27 March 2000. The assessee in the return claimed a deduction of Rs.1.82 crores as exempt from tax under Section 10(33) but also claimed a set off of the loss incurred on the sale of the units. This was disallowed by the Assessing Officer on the ground that the transaction was in the nature of dividend str....
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....can only be in respect of earning of taxable income. This is the purport of Section 14A." During the course of this judgment, it would be necessary to revisit the decision of the Supreme Court in Walfort. At this stage, however, it needs to be emphasized that the provisions of Section 14A were construed in Walfort to evince the Parliamentary intent not to allow deduction in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act against taxable income. Section 14A is clarificatory of the position that expenses can be allowed only to the extent that they are relatable to the earning of taxable income. Only those expenses which are in respect of the earning of taxable income can be allowed. That Section 14A broadens the theory of apportionment of expenditure between taxable and non-taxable income is evident from the following observations of the Supreme Court: "The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words "expenditure incurred....
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....owance is established - which is the relationship of the expenditure with income which does not form part of the total income - a disallowance has to be effected. All expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed under Section 14A. Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation. Insertion of Subsections (2) and (3) to Section 14A: 25. Subsections (2) and (3) of Section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from 1 April 2007. Subsections (2) and (3) provide as follows: "14A(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 p....
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....method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginning on or before 1 April 2001 either to reassess under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154. 26. The circumstances in which the pr....
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....any notwithstanding that no income tax is payable by a domestic company on its total income computed in accordance with the provisions of the Act. Subsections (4) and (5) of Section 115O provide as follows: "(4) The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under subsection (1) or the tax thereon." Subsection (1) of Section 115O begins with a non obstante provision and stipulates that any amount declared, distributed or paid by a company by way of dividends shall be charged to additional income tax: 'Additional' because this is in addition to income tax chargeable in respect of the total income of the domestic company. The total income of a domestic company is chargeable to income tax under the Act. In addition, any amount declared, distributed or paid b....
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....dian Bank Limited, AIR 1965 SC 1473 at paragraph19 page 1476}. Section 2(45) defines the expression "total income" to mean the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Section 4 charges the total income "of the previous year" of every person to income tax. Section 5 makes a reference to the scope of the total income of any previous year of a person who is the recipient. This is defined to include all income, from whatsoever sources derived, which is received or deemed to be received or which accrues or is deemed to have accrued in India or which accrues or arises outside India during the previous year. Section 10 defines those categories of income which shall not be included in computing the total income of the previous year of any person. Income tax is a tax on income in the hands of the assessee. Hence, when Section 14A disallows expenditure incurred by the assessee in relation to income which does not form part of the total income, it would include categories of income such as dividend from shares and income from mutual fund which under Section 10 are not to be included in the total income. Since dividend income and income fro....
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.... as dividends were liable to deduct tax at source and shareholders receiving the dividend were entitled to take credit of such tax deducted at source. As this method was found to be cumbersome, Parliament chose to exempt dividend income in the hands of the shareholder and chose to levy additional income-tax on the amount of profits declared, distributed or paid as dividend by the domestic companies. Thus, by inserting Section 115O, additional income-tax is levied on the amount of profits declared, distributed or paid as dividend and by inserting Section 10(33) it is made clear that the dividends referred to in Section 115O would be exempt from tax. 36. In Purushottamdas Thakurdas vs. C.I.T.{(1963) 48 ITR 206} the Supreme Court construed the provisions of Section 16(2) and Section 49B of the Indian Income Tax Act, 1922. Subsection (2) of Section 16 provided that any dividend shall be deemed to be income of the year in which it is paid regardless of the question as to when the profits out of which the dividend is paid were earned. By a deeming fiction introduced by Section 49B, when a dividend was paid to a shareholder by a Company which was assessed to tax, the income tax in resp....
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....eholders. The shareholders, in turn, showed dividend income in their returns of income and claimed credit for tax deducted on the basis of these certificates. The existing method was found to involve "a lot of paper work" and there were demands that tax on dividend should be abolished as it would tantamount to double taxation, once in the hands of the Company and again in the hands of the shareholders. The Circular states that the Finance Act of 1997, therefore, introduced a new system of collecting tax on profits distributed by the Company by way of dividend, which was to be in addition to the income tax chargeable in respect of the total income of the Company. 39. The circular issued by the CBDT as a matter of fact clearly establishes that prior to the introduction of Section 115O of the Finance Act of 1997, corporate dividends were taxed in the hands of shareholders as income from other sources. This provision was abolished by the introduction of Section 115O. Under subsection (1) of Section 115O, an additional income tax was imposed on profits distributed by a Company by way of dividend and a new clause, clause 33 was inserted in Section 10 to exempt dividend income in the h....
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....d by the first category of Section 10 where the income is fully exempt from taxation in the hands of any person - that Section 14A has been enacted. 42. We do not find any warrant for an artificial reading down of the provisions of Section 14A in the manner that is sought to be done. Section 14A plainly stipulates that 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 Act. Dividend income does not form part of the total income under the Act by virtue of the provisions of Section 10(33). Consequently, it is impossible to accede to the submission that Section 14A should be confined only to those categories of income, such as agricultural income, where the income is exempt in the hands of any person. The judgment of the Privy Council in C.I.T. vs. Rameshwar Singh,{(1935) 3 ITR 305}, is of no relevance to the issue involved in this case. While construing the provisions of the Income Tax Act, 1922, the Privy Council observed that agricultural income is excluded altogether from the scope of the Act whatsoever or by whomsoever it may be received. This would have no bearing on the....
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....mplement the provisions of Subsection (1). The object of subsection (2) is to provide a uniformity of method where the Assessing Officer is, on the basis of the accounts of the assessee, 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 the Act; (vi) Even in the absence of sub-section (2) of Section 14A, the Assessing Officer would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The Assessing Officer would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all the relevant facts and circumstances; (vii) Consequent upon the insertion of subsection (2), the disputes which had arisen between tax payers and the Revenue on the method of determining the expenditure to be disallowed, have been given a quietus by adopting a uniform method of determination; (viii) Subsection (2) of Section 14A does not enable the Assessing Of....
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....sions contained in Chapter XIID are special provisions relating to tax on the distributed profits of domestic companies. Even Section 115O in Chapter XIID clearly states that the additional income-tax liability thereunder is on the amount of profits declared, distributed or paid by a domestic company as dividend. Thus, the additional income tax under Section 115O is a tax on profits and not a tax on dividend. (b) Distribution of profits as dividend being appropriation of profits, the company distributing profits as dividend is liable to pay tax on the total income inclusive of the amount of profits distributed as dividend. By inserting Section 115O, the legislature has imposed additional income-tax on the amount of profits distributed as dividend. Thus, tax as well as additional income-tax are taxes levied on the profits of a domestic company. From the fact that the additional income-tax is levied only on profits declared, distributed, or paid as dividend, it cannot be said that the additional income-tax is not a tax on the profits of the domestic company but a tax on dividend. (c) Where profits of a Company are distributed as dividend, those profits are taxed in ....
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.... additional tax is a tax on the profits of the Company which is distributed as dividend, whereas, tax in the hands of a shareholder is a tax on dividend income. (g) This is also supported by Circular No.763 dated 18 February 1998 issued to explain the provisions of Section 115O and Section 10(33) inserted by Finance Act 1997. The Circular, clearly and unequivocally states that Section 10(33) and Section 115O are intended to exempt dividend income and levy a new tax on distributed profits on domestic companies. Thus, what is collected under Section 115O is the additional tax on profits distributed as dividend and not a tax on dividends, because dividends received are exempt under Section 10(33). (xii) The general principle of law is that a Company is chargeable to tax on its profits as distinct taxable entity and has to pay tax in discharge of its own liability and not on behalf of or as an agent of its shareholders. This position of the general law is recognized and incorporated in Section 115O and is not overridden by the statutory provision; (xiii) Income from dividend and similarly, income from mutual funds do not form part of the total income under Se....
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....uction would lead to a result unintended by the Legislature or result in an absurdity. For one thing, individual cases of hardship, set up on the basis of hypothetical examples tendered at the Bar do not establish absurdity of the law. Moreover, it has been submitted by the Additional Solicitor General that the example tendered before the Court proceeds on several assumptions these being: (i) An assumption that had there been no tax under Section 115O, the Board of Directors of a Company would have recommended a higher dividend (higher by the extent of the tax) for distribution to the shareholders; (ii) The assumption that in effect, it is the shareholder who bears the tax under Section 115O(1) since the shareholder has forgone the assumed higher dividend; (iii) An assumption that the payment of tax under Section 115O(1) is on behalf of the shareholder. On these assumptions, the conclusion is sought to be drawn by the assessee that the shareholder will suffer twice, namely, by the assumed payment of tax on his behalf under Section 115O(1) and by the disallowance on expenditure claimed under Section 14A. We are in agreement with the submission which has been urged on behalf of the U....
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....ncome 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: -A X B / 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 sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to onehalf 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 ba....
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....n (2) of Section 14A and at the least does not prescribe an accepted or a well settled method for determining expenditure. 49. On the other hand, it has been submitted on behalf of the Union of India that (i) Judicial review of the measure or manner in which a tax is computed is limited and it is only if there is perversity or capriciousness in the method adopted by the Legislature, that it would violate Article 14; (ii) The provisions of Rule 8D are in conformity with the principle contained in Section 14A(1) and only provide for a measure and mechanism to compute the portion of expenditure attributable to exempt income; (iii) Rule 8D provides a rational, fair and reasonable method for computing the quantum of expenditure attributable to tax exempt income. The provision presents a reasonable solution to assess a complex accounting and tax problem and the underlying rationale has been explained in the affidavit in reply; (iv) The fact that Rule 8D adopts a uniform method as a means of computation does not make it arbitrary or unreasonable: (a) The method will be adopted only if the Assessing Officer is not satisfied of the correctness of the claim of the assessee, having regard ....
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.... a fee. The profit element of such fee usually does not exceed 1% of the portfolio value. As set out in detail in the affidavit in reply adopting 0.50% of the average of the value of investments (income from which is tax exempt) is not unreasonable and results in identification of expenditure which has a direct and immediate connection with the tax exempt income; (ix) If a prorate method was applied in the alternative to the aforesaid method provided in Rule 8D(2)(iii) the amount of disallowance would be immense, as set out in the Chart tendered to the Court by the Revenue. In the case of the Appellant for the assessment year under consideration, on an expenditure of Rs. 189.77 crores (excluding direct expenditure and expenditure on power, fuel etc.), the disallowance under the prorata method as followed in Rule 8D(2)(ii) would be Rs.82 crores. However, under the 0.5% measure provided by Rule 8D(2)(iii) the disallowance is Rs.1.57 crores. Hence, the present measure is in fact, more favourable to the assessee and cannot under any circumstances be said to be unconstitutional; (x) Hence, the intention of Section 14A is clearly to disallow all expenses relating to the non-taxable incom....
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....e. The power of the Legislature to classify is of "wide range and flexibility" so that it can adjust its system of taxation in all proper and reasonable ways." 52. Again, the Supreme Court emphasized that though the method suggested may be better than the method actually adopted by the legislature, the hardship in individual cases cannot in any event be avoided. Unless the method which has been adopted is capricious, fanciful, arbitrary or clearly unjust, the Court would be loathe to strike down the law: "It is true taxation law cannot claim immunity from the equality clause of the Constitution. The taxation statute shall not also be arbitrary and oppressive, but at the same time the Court cannot, for obvious reasons, meticulously scrutinize the impact of its burden on different persons or interests. Where there is more than one method of assessing tax and the Legislature selects one out of them, the Court will not be justified to strike down the law on the ground that the Legislature should have adopted another method which, in the opinion of the Court, is more reasonable, unless it is convinced that the method adopted is capricious, fanciful, arbitrary or clearly unju....
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....ts would not substitute judicial wisdom for legislative wisdom." 55. In Gujarat Ambuja Cements Limited v. Union of India{2005 AIR (SC) 3020}. Mrs. Justice Ruma Pal, speaking for a Bench of two Learned Judges followed the observations of the Constitution Bench in Ganga Sugar (supra) and observed thus: "Because of the inherent complexity of fiscal adjustments of diverse elements in the field of tax, the legislature is permitted a large discretion in the matter of classification to determine not only what should be taxed but also the manner in which the tax may be imposed. Courts are extremely circumspect in questioning the reasonability of such classification but after a "judicial generosity is extended to legislative wisdom, if there is writ on the statute perversity, madness in the method or gross disparity, judicial credibility may snap and the measure may meet with its funeral". 56. These principles must guide the determination by this Court on the constitutional challenge to sub sections (2) and (3) of Section 14A and to Rule 8D. A fundamental basis of the challenge addressed before the Court is the prescription of a uniform method for determining the disallowance....
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.... satisfied with the correctness of the claim of the assessee. Sub section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income. 58. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated". (M.A. Rasheed v. The State of Kerala{AIR 1974 SC 2249. (at para 7 page 2252)}. A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the as....
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....he assessee having regard to the accounts of the assessee. It is because the assessee is unable to establish the correctness of the claim in respect of the expenditure incurred in earning income which does not form part of the taxable income that the Assessing Officer is compelled to make a determination. The Learned Additional Solicitor General has placed before the Court material that would indicate that if a simplistic prorate disallowance were to be made, that would as a matter of fact have resulted in a disallowance of Rs.82 Crores on an expenditure of Rs.189.77 Crores. As opposed to this the disallowance under Rule 8D(2)(iii) is restricted to Rs.1.57 Crores. Before the legislature prescribed a uniform method, disputes had occurred between assessees and the department in regard to the method to be adopted in computing the expenditure relatable to the earning of non-taxable income. In this background, if the legislature considered it appropriate to prescribe a particular method that legislative choice cannot be held to be arbitrary or oppressive. Thirdly, sub sections (2) and (3) and the proviso to Section 14A contain sufficient safeguards that would ensure a reasonable exercis....
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....inate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. C.4 Retrospectivity 61. On behalf of the assessee it has been urged that sub sections (2) and (3) of Section 14A and Rule 8D cannot have retrospective effect. Counsel submitted that procedural laws are those which merely prescribe the manner in which rights and responsibilities may be exercised and enforced in a Court. Rule 8D which lays down the rules for determining the amount of disallowance under Section 14A, it has been urged, cannot be regarded as a procedural rule but, is a provision which purports to determine the income which is chargeable to tax. Moreover, it has been urged that Rule 8D has adopted an artificial method for computing the disallowance of expenditure attributable to the earning of non-taxable income and it is not one out of several well accepted or well settled modes of computation. Hence, it was submitted that the present case is distinguishable from the situation which arose before the Supreme Court in Commissioner of Wealth Tax v. Sharvan Kumar Swarup and Sons{(1994) 210 ITR 886}. Further, reliance was placed on Section 295(4) which specifi....
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....ed retrospectively. These submissions now fall for determination. 63. The fundamental principle of law is that Parliament has plenary power to legislate, on matters falling within its legislative competence and that power extends to the enactment of legislation with prospective and retrospective effect. Legislative competence of Parliament to enact the law is not in dispute. Law raises a presumption that an amendment which affects substantive rights and obligations is intended by the legislature to have prospective effect. On the other hand, amendments on matters of procedure are presumed to be retrospective so as to apply to pending cases. These are, however, presumptions which can be out weighed by the language of an amending statute. That is because the legislature has plenary power to legislate both prospectively and retrospectively. Therefore whether an amending provision is to operate with prospective or retrospective effect has to be determined on the language and ambit of the statutory provision. Amendments which are clarificatory or declaratory of the position in law, as the legislature intended it always to be, are regarded as being retrospective. Hence, when the legis....
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....re{AIR 1960 Mys. 326}, and General S. Shivdev Singh v. State of Punjab{(1959) P.L.R. 514 (F.B.)}" (ii) In Allied Motors (P) Ltd. v. Commissioner of Income Tax{(1997) 91 Taxman 205 (SC), the Supreme Court considered the provisions of Section 43B of the Income Tax Act, 1961 which were aimed at curbing activities of those tax payers who did not discharge their statutory liability towards payment of excise duty, employer's contribution to provident fund etc. for long periods of time, but claimed deductions on the ground that the liability to pay had been incurred in the relevant previous year. While inserting Section 43B it was not realized that its language would cause hardship to those tax payers who had paid sales tax within the statutory period prescribed for payment although the payment did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year and could be paid only in the next quarter which fell in the next accounting year. Hence, though the sales tax had been paid by an assessee within the statutory period prescribed and prior to the filing of the income tax return, the assessee....
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....ut by equating the payment of tax, duty, cess and fee with contributions to welfare funds. The Finance Act of 2003 was made applicable only with effect from 1 April 2004. Hon'ble Mr. Justice S.H. Kapadia (as the Learned Chief Justice then was) speaking for the Supreme Court held that it was curative in nature and would apply retrospectively with effect from 1 April 1988; (v) In Commissioner of Wealth Tax v. Sharvan Kumar Swarup and Sons{(1994) 210 ITR 886}, Rule 1BB of the Wealth Tax Rules 1967 came up for consideration. Prior to its amendment on 1 April 1989 Section 7(1) of the Wealth Tax Act provided that subject to any rules made in this behalf, the value of any asset other than cash, shall be estimated to be the price which in the opinion of the wealth tax officer it would fetch if sold in the open market on the valuation date. Under Rule 1BB the value of a house used for residential purposes was to be determined in a particular manner. The issue before the Supreme Court was whether this rule was a provision of substantive law, not expressly applicable to valuation for earlier years and therefore only prospective or whether it was merely procedural and would apply ....
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....ther deemed or actual. Section 9 defines income deemed to accrue or arise in India. By Clause (ii) of sub section (1) of Section 9, income which falls under the head 'salaries', if it is earned in India is included in such income. The Gujarat High Court had held that the words "earned in India" had to be interpreted as "arising or accruing in India" and not "from service rendered in India". Hence, as long as the liability to pay an amount under the head 'salaries' arose in India, Clause (ii) could be invoked. To overcome this decision, Section 9(1)(ii) was amended by the Finance Act of 1983 with effect from 1 April 1979 to include an explanation. The explanation provided that income of the nature referred to in the Clause payable for service rendered in India shall be regarded as income earned in India. The Gauhati High Court held that the explanation of 1983 was given effect from 1 April 1979 and would therefore not apply to assessment years prior thereto. By the Finance Bill of 1999 a new explanation was substituted with effect from 1 April 2000 which declared that income of the nature referred to in the clause payable for service rendered in India and the rest pe....
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....planation 4 to Section 271(1)(c)(iii). In its earlier decision in the case of Virtual Soft Systems Ltd. v. Commissioner of Income Tax,{(2007) 9 SCC 665}, the Supreme Court had rejected the contention of the Revenue that the amendment was clarificatory and retrospective holding that the amendment was stated to take effect from 1 April 2003. In Gold Coin the larger Bench held that the Court has to analyze the nature of the amendment to come to a conclusion whether it is in reality a clarificatory or declaratory provision. Hence, the date from which the amendment is made operative does not conclusively decide the question. The Court would have to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether the amendment is clarificatory or substantive. Adverting to its earlier decision, the Supreme Court held that the definition of the expression 'income' in Section 2(24) is inclusive and includes losses. The Finance Act had merely intended to make what was otherwise implied, explicit. Since the expression 'income' had been held by the Supreme Court to include losses, consequently where in a case on account of addition o....
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.... the retrospective effect. 66. These principles would have now to be construed in the context of the provisions of Section 14A. The first point to be noted about the provisions of Section 14A and Rule 8D is that different dates have been provided in these provisions for their enforcement: (i) Sub section (1) of Section 14A was inserted by the Finance Act of 2001 with retrospective effect from 1 April 1962; (ii) Sub sections (2) and (3) were inserted in Section 14A by the Finance Act of 2006 with effect from 1 April 2007; (iii) The proviso was inserted by the Finance Act of 2002 with retrospective effect from 11 May 2001; (iv) Rule 8D was inserted by the Income Tax (Fifth Amendment) Rules, 2008 by publication in the Gazette dated 24 March 2008. Sub rule (2) of Rule 1 stipulates that the rules shall come into force from the date of their publication in the Official Gazette. This by itself is not conclusive. Secondly, prior to the insertion of Section 14A by the Finance Act of 2001 the Supreme Court had held in its decisions in Indian Bank, Maharashtra Sugars and Rajasthan State Warehousing Corporation (supra) that in the case of a composite and ....
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....Supreme Court in its judgment in Sedco (supra). The fourth aspect of the matter which would merit emphasis, is the principle of law which has been laid down by the Supreme Court in Shravan Kumar's case (supra). The test which has been formulated by the Supreme Court is as to whether the rule which is prescribed by subordinate legislation "merely provides a choice amongst well known and well settled modes" - in that case of valuation. In the case before the Supreme Court, the rule under the Wealth Tax Rules had adopted the method of capitalizing income on a number of years' purchase value. The Supreme Court emphasized that this was essentially a rule of evidence as to the choice of one of the well accepted methods of valuation to achieve uniformity in valuation resulting from the application of different methods to properties of a similar nature and character. The learned Additional Solicitor General has argued before us that the fact that Rule 8D is not in that sense an embodiment of a "well known and well settled mode" or a "well accepted method" is no indicator in regard to its reasonableness. We have upheld the contention of the Union of India that Rule 8D is reasonable ....
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....ospective effect to subordinate legislation. However, unless expressly or by necessary indication, a contrary provision is made, no retrospective effect is to be given to any rule so as to prejudicially affect the interests of the assessee. 67. Even in the absence of sub sections (2) and (3) of Section 14A and of Rule 8D, the Assessing Officer was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub section (1) of Section 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Consequently, dehors the provisions of Sections (2) and (3) of Section 14A and Rule 8D, the Assessing Officer was entitled to determine by the application of a reasonable method what quantum of the expenditure incurred by the assessee would have to be disallowed on the ground that it was incurred in relation to the earning of income which does not form part of the total income under the Act. Undoubtedly in determining what would constitute a reasonable method for effecting the disallowance, the Assessin....
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....form part of the total income in view of the provisions of Section 10(33) as they then stood. Hence, the expenditure which has been incurred in relation to the earning of that income would have to be apportioned and disallowed. Even if Rule 8D has no application to Assessment Year 2002-03 the Assessing Officer would be duty bound to compute the extent of the disallowance by the application of a reasonable method having regard to all the facts and circumstances of the case. In order to facilitate this exercise, an order of remand to the Assessing Officer would be necessary. 70. However, it has been urged on behalf of the assessee that there is no factual basis for making a disallowance in view of the findings recorded by the Tribunal for Assessment Years 1998-99, 1999-00 and 2001-02. Hence, it was urged that the Tribunal had wrongly restored the proceedings to the Assessing Officer. Now a perusal of the findings of the Tribunal for Assessment Year 1998-99 would show that the Tribunal held that no nexus between the investments made by the assessee in dividend earning shares and borrowings by the assessee has been established. This order was followed for Assessment Years 1999-00 an....
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....Even if the assessee has utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the Assessing Officer has to determine. Whether or not any expenditure was incurred by the assessee in relation to the earning of non-taxable income falls within the domain of the Assessing Officer. The basis on which the Tribunal had come to its decision for Assessment Years 1998-99, 1999-00 and 2001-02 would not conclude that question. 72. The precedents on which reliance has been placed by the assessee would have now to be analyzed. The Supreme Court in its judgment in Radhasoami Satsang (supra) held that res judicata does not apply to income tax proceedings since each assessment year is a unit. However, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging that order, it would not be appropriate to allow the position to be changed in a subsequent year, in the....
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....sessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001-2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003. c)....