COMMISSIONER OF INCOME TAX 5 MUMBAI versus M/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER on 31 January 2018

ACOMMISSIONER OF INCOME TAX 5 MUMBAI

v.

M/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER

(Civil Appeal No. 2165 of 2012)

BJANUARY 31, 2018

[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]

Income Tax Rules, 1962 – r.8D – Said rule providing formachinery to give effect to charging section, i.e. s.14A, Sub-sections(2) and (3) of Income Tax Act, 1961 – Nature of operation –CProspective or Retrospective – Plea of appellant-revenue thatcharging section i.e. s.14A being retrospective, the machineryprovision,i.e. r.8D has also to be retrospective – Held: Provisionsof s.14A, inserted by Finance Act, 2001, were fully workable withoutthere being any mechanism provided for computing the expenditureDincurred in relation to income which does not form part of the totalincome – Sub-sections (2) and (3), providing to determine the amountof such expenditure, were inserted by amendment in s.14A byFinance Act, 2006 – Memorandum explaining the provision inFinance Bill, 2006, clearly mentioned that amendments brought byFinance Bill, 2006 would take effect from 01.04.2007 – CircularEdtd. 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 beimplemented w.e.f. 2007-08 – Further, r.8D was inserted in 1962Rules by notification dtd. 24.03.2008 indicating that the new methodprovided thereunder for computing the expenditure was to be utilizedFfor the Assessment Year 2008-09 and onwards – There is noindication in r.8D that it was intended to apply retrospectively –Thus, applying the principles of statutory interpretation forinterpreting retrospectivity of a fiscal statute and looking into thenature and purpose of sub-ss. (2) and (3) of s.14A as well as purposeand intent of r.8D coupled with the explanatory memorandum inGthe Finance Bill, 2006 and the departmental understanding asreflected by Circular dated 28.12.2006, it is clear that r.8D wasintended to operate prospectively – Interpretation of Statutes –Income Tax Act, 1961 – Finance Act, 2001 – Finance Act, 2006 –Income Tax (14[th] Amendment Rules, 2016) – Circulars/NotificationsH– Circular No. 14/2006 dtd. 28.12.2006.

Interpretation of Statutes – Nature of operation – Prospectiveor retrospective – Held: Every statute is prima facie prospective unlessit is expressly or by necessary implication made to have retrospectiveoperation – However, mere date of enforcement of statutoryprovisions does not lead to the conclusion that the statute isprospective in nature.

Maxims – “nova constitutio futuris formam imponere debetnon praeteritis” – Principle of presumption of prospectivity of astatute – Discussed.

Interpretation of Statutes – Machinery provision of a taxingstatute – Prospective or retrospective – Held: Applicability of themachinery provision whether it is prospective or retrospectivedepends 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 legislationwithin the fields assigned to them, it may legislate prospectivelyas well as retrospectively. It is a settled principle of statutoryconstruction that every statute is prima facie prospective unlessit is expressly or by necessary implications made to haveretrospective operations. Legal Maxim “nova constitutio futurisformam imponere debet non praeteritis”, i.e. ‘a new law ought toregulate what is to follow, not the past’, contain a principle ofpresumption of prospectivity of a statute. [Para 23][516-D-E]

“Principles of Statutory Interpretation” 14[th] Edition,in Chapter 6 by Justice G. P. Singh – relied on.

2.1 The sub-sections (2) and (3) were inserted in Section14A, Income Tax Act, 1961 by Finance Act, 2006. Thememorandum explaining the provision in Finance Bill, 2006, inreference to the methods for allocating expenditure in relationto exempt income clearly mentioned that amendments broughtby Finance Bill, 2006 will take effect from 01.04.2007. Afterinsertion of sub-section (2) and (3) in Section 14A by FinanceBill, 2006, Circular dated 28.12.2006 was issued by the CentralBoard of Direct Taxes. [Paras 28, 30][522-F-G; 523-F]

2.2 Income Tax Rules, 1962 were amended by notificationdated 24.03.2008 by which Rule 8D was inserted. The A

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504SUPREME COURT REPORTS

Amethodology for determining amount of the expenditure inaddition to income not includable in total income was for the firsttime prescribed by Rule 8D as was envisaged in Section 14Asub-section (2) and sub-section (3). [Paras 21, 31][515-A; 523-G-H]

BThe Commissioner of Income Tax (Central – 1 NewDelhi) 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 indicatesCthat department understood that sub-section (2) and sub-section(3) was to be implemented with effect from assessment year 2007-2008. Rule 8D prescribing the method was brought into statutebook with effect from 24.03.2008 to implement sub-section (2)and sub-section (3) with effect from assessment year 2008-09, isclear indicator of the fact that a new method for computing theDexpenditure was brought in by the rules which was to be utilizedfor computing expenditure for the Assessment Year 2008-09 andonwards. [Para 32][524-B-C]

3.1 When Section14A was inserted by Finance Act, 2001, itwas with retrospective effect with effect from 01.04.1962 whereasEFinance Act, 2006, by which sub-section (2) and sub-section (3)to Section 14A were inserted, it was with effect from 01.04.2006which was mentioned in clause 1(2) of Finance Act, 2006. It is,however, well settled that the mere date of enforcement ofstatutory provisions does not conclude that the statute isFprospective in nature. The nature and content of statute have tobe 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 theprovisions were fully workable without there being any mechanismGprovided for computing the expenditure. Although Section 14Awas made effective from 01.04.1962 but Proviso was immediatelyinserted by Finance Act, 2002, providing that Section 14A shallnot empower assessing officer either to reassess under Section147 of the 1961 Act or pass an order enhancing the assessmentor reducing a refund already made or otherwise increasing theH

liability of the assessees under Section 154 of the 1961 Act, forany assessment year beginning on or before 01.04.2001. Thus,all concluded transactions prior to 01.04.2001 were made finaland not allowed to be re-opened. [Para 35][525-A-C]

4. Machinery provision of a taxing statute has to give effectto its manifest purposes. But the applicability of the machineryprovision whether it is prospective or retrospective depends onthe content and nature of the statutory scheme. [Para 43][529-B-C]

Commissioner of Income Tax – III v. Calcutta Knitwears,Ludhiana (2014) 6 SCC 444 – distinguished.

5.1 Rule 8D was again amended by Income Tax (FourteenthAmendment) Rules, 2016 w.e.f. 02.06.2016, by which Rule 8Dsub-rule (2) was substituted by a new provision. The method fordetermining the amount of expenditure brought in force w.e.f.24.03.2008 has been given a go-bye and a new method has beenbrought into force w.e.f. 02.06.2016, by interpreting the Rule 8Dretrospective, there will be a conflict in applicability of 5[th] & 14[th]Amendment Rules which clearly indicates that the Rule has aprospective operation, which has been prospectively changed byadopting another methodology. [Paras 45, 46][530-E-H; 531-A-B]

5.2 The methodology as provided under Rule 8D wasneither a well-known nor well-settled mode of computation. Thenew mode of computation was brought in place by Rule 8D. Noassessing Officer, even in his imagination could have applied themethodology, which was brought in place by Rule 8D. There isno indication in Rule 8D to the effect that it was intended to applyretrospectively. Applying the principles of statutory interpretationfor interpreting retrospectivity of a fiscal statute and looking intothe nature and purpose of sub-section (2) and sub-section (3) ofSection 14A as well as purpose and intent of Rule 8D coupledwith the explanatory notes in the Finance Bill, 2006 and thedepartmental understanding as reflected by Circular dated28.12.2006, it is clear that Rule 8D was intended to operateprospectively. It is held that Rule 8D is prospective and couldnot have been applied to any assessment year prior to Assessment A

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AYear 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. GoldBCoin Health Food Private Limited (2008) 9 SCC 622:[2008] 12 SCR 179; Commissioner of Wealth Tax,Meerut v. Sharvan Kumar Swarup & Sons (1994) 6 SCC623 : [1994] 3 Suppl. SCR 750 – distinguished.

Govind Das and others v. the Income Tax officer andCanother (1976) 1 SCC 906 : [1976] 3 SCR 44; Jayamand 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 andDAnother (2017) 7 SCC 421; State of Jharkhand & Ors.v. Shiv Karampal Sahu (2009) 11 SCC 453 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2165of 2012.

From the Judgment and Order dated 12.09.2011 of the High Courtof Judicature at Bombay in ITA (L) No. 947 of 2011.

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CIT 5 MUMBAI v. ESSAR TELEHOLDINGS LTD. THR. ITSMANAGER

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. GargiKhanna, Ms. Rekha Pandey, Mrs. Anil Katiyar, H. R. Rao, ManishPushkarna, 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, RaghavPandey, 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, SumitLalchandani, 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., AdityaBhattacharya, 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 KumarChawla, Rustom B. Hathikhanawala, Bimal Roy Jad, Swami Nath,N. G. Dev, Ms. Vithika Garg, Vijay Kumar, Ms. Vidushi Garg, RajeshMahna, Bhargava V. Desai, S. Gowthaman, Ashok Mathur, BirendraKumar Mishra, Vivek Jain, Mrs. Shally Bhasin, Ajay Sharma, ChandraPrakash, Aljo K. Joseph, Mayank Nagi, Tarun Singh, Shekhar Prit Jha,Advs. for the appearing parties.

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AThe Judgment of the Court was delivered by ASHOK BHUSHAN, J. 1. Delay Condoned. Leave granted.

2. This appeal when alongwith several appeals were heard on16.11.2016, this Court noticed that in batch of cases, four questions havearisen. The present batch of cases of which Civil Appeal No. 2165 is aBleading case relates only to Question No.2, which is to the followingeffect:- “Whether sub-section (2) and sub-section (3) of Section 14Ainserted with effect from 01.04.2007 will apply to all pendingassessments?

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Whether Rule 8D is retrospectively applicable?”

3. All these appeals raising only above question of law have beenheard together and are being decided by this common judgment. Fordeciding all these appeals, it shall be sufficient to refer facts andDproceedings in Civil Appeal No. 2165 of 2012.

FACTS

Civil Appeal No. 2165 of 2012

4. This appeal has been filed against the judgment of BombayHigh Court dated 12.09.2011 in Income Tax Appeal (L) No. 947 of 2011Eby which judgment the High Court has dismissed the appeal filed by theCommissioner of Income Tax following an earlier judgment of theBombay High Court dated 12.08.2010 in the case of Godrej Boyce andManufacturing Company Limited Vs. Deputy Commissioner ofIncome Tax, Mumbai & Anr., reported in (2010) 328 ITR 81(Bom.).FThe assessment year in issue is 2003-2004. The assessee (respondentin appeal) filed his return of income on 01.12.2003 declaring a loss ofRs.69,92,67,527/-. A notice under Section 143(2) was issued to theassessee. The Assessing Officer vide its order dated 27.03.2006 heldthat during the year under consideration, the assessee company was inreceipt of both taxable and non-taxable dividend income. Accordingly,Gthe dividend on investment exempt under Section 10(23G) was consideredby 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 croreswas 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 byorder dated 05.03.2009. The assessee filed an appeal before the ITAT.The ITAT allowed the assessee’s appeal relying on the Bombay HighCourt’s judgment in Godrej and Boyce Manufacturing CompanyLimited versus Deputy Commissioner of Income Tax, Mumabi &Another., reported in (2010) 328 ITR 81(Bom.). The ITAT held thatRule 8D is only prospective and in the year under consideration Rule 8Dwas not applicable. ITAT set aside the order of CIT(A) and restoredthe issue back to the file of the Assessing Officer for de novo adjudicationwithout invoking the provisions of Rule 8D. Against the order of ITAT,the revenue filed an appeal before the High Court. The High Courtfollowing its earlier judgment of Godrej and Boyce ManufacturingCompany Limited Vs. Deputy Commissioner of Income Tax,Mumbai & Anr. (supra) dismissed the appeal. The Commissioner ofIncome Tax aggrieved by the judgment of the High Court has come upin this appeal.

6. In the appeal, the only question, which has been pressed forour consideration is the first question, which was raised before the HighCourt, 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 isonly prospective in operation and for the year under assessment itwas not applicable?”

7. Thus, in this batch of appeals, the only question to be consideredand answered is as to whether Rule 8D of Income Tax Rules isprospective in operation as held by the High Court or it is retrospectivein operation and shall also be applicable in the assessment year in questionas 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 otherlearned counsel have been heard for different assessees in this batch ofappeals.

“SUBMISSIONS”

9. Learned counsel for the appellant (revenue) submit thatprovisions of Section 14A being clarificatory in nature and Rule 8D is a A

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Aprocedural provision which provided only a machinery for theimplementation of sub-sections (2) and (3), Rule 8D is retrospective innature. The machinery provisions by which the charging section is to beimplemented or workable are to be given retrospective effect, which isco-terminus with the period of operation of the main charging provision.The charging section i.e. Section 14A admittedly being retrospective,Bthe machinery provision, i.e. Rule 8D has also to be retrospective.

10. Learned counsel for the revenue has placed reliance onjudgments of this Court, i.e., Commissioner of Wealth Tax, MeerutVs. Sharvan Kumar Swarup & Sons, (1994) 6 SCC 623;Commissioner of Income Tax I, Ahmedabad Vs. Gold Coin HealthCFood Private Limited, (2008) 9 SCC 622 and Commissioner ofIncome Tax – III Vs. Calcutta Knitwears, Ludhiana, (2014) 6 SCC444.

11. Shri S.K. Bagaria, learned senior counsel appearing for theassessee refuting the submission of learned counsel for the revenueDcontends that provisions of Rule 8D are only prospective in nature. Hesubmits that when a new liability is imposed by a statutory provision thenthe same cannot be retrospective. He submits that provisions insertedby Rule 8D are new provision for computing the expenditure which canin no manner be retrospective. He submits that Rule 8D was madeEapplicable by Fifth Amendment Rules, 2008 providing in Clause 2 i.e.“they shall come into force from the date of their publication in the officialgazette”. He submits that the Central Board of Direct Taxes vide itscircular dated 28.12.2006 while explaining the substance of the provisionof sub-sections (2) and (3) of Section 14A clearly mention that theaforesaid provisions were to be applicable from assessment year 2007-F2008 onwards. Hence, Rule 8D, which is framed to give effect to theprovisions of sub-sections (2) and (3) cannot operate from any dateprior to assessment year 2007-2008.

12. Shri Ajay Vohra, learned senior counsel appearing for assesseesubmits that Rule 8D has been amended by Income Tax (14[th]GAmendment Rules, 2016) w.e.f. 02.06.2016 by which a new methodologyof computing the expenditure in relation to income which does not formpart of the total income has been brought in place. In event, the argumentis 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 beensubstituted w.e.f. 02.06.2016? The amendment made w.e.f. 02.06.2016H

reinforces that the methodology of computing the expenditure in relationto income which does not form part of the total income is prospectiveand has been change w.e.f. 02.06.2016, no other interpretation ispermissible. He further submits that subordinate legislation is ordinarilyprospective and Rule 8D being subordinate legislation can have noretrospective effect. Learned counsel for the assessees have also placedreliance on various decisions of this Court, which shall be referred towhile considering the submissions in detail.

13. Shri S.S.H. Rizvi, learned counsel appearing for the assesseein Civil Appeal arising out of SLP (C) 16185 of 2016 submits that Revenuehas already agreed before the ITAT that matter be remitted to AssessingOfficer for fresh decision in light of judgment of the Bombay High Courtin Godrej and Boyce Manufacturing Company (supra), hence, it hadno jurisdiction to file an appeal before the High Court. He submits thatHigh Court has rightly dismissed the appeal of the Revenue, relying onthe judgment of the Bomabay High Court in Godrej and BoyceManufacturing Company (supra) after noticing the fact that no interimorder was passed by this Court in Special Leave Petition filed againstthe said judgment. It has been submitted by Shri Rizvi that no otherquestion arose in the appeal before the High Court hence the Revenuehas approached this Court by filing this Special Leave Petition withoutany basis.

Relevant Statutory Provisions

14. Rule 8D has been framed to give effect to the provisions ofSection 14A sub-section (2) and (3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”). The statutory scheme asdelineated by Section 14A has to be understood before correctlyappreciating the nature and purport of Rule 8D. Section 14A was firstinserted 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 intotal income. -– For the purposes of computing the total incomeunder this Chapter, no deduction shall be allowed in respect ofexpenditure incurred by the assessee in relation to income whichdoes not form part of the total income under this Act.”

15. The purpose for which Section 14A was introduced was givenin the explanatory memorandum issued with the Finance Bill, 2001, whichreads a sunder:- AB

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A“Certain incomes are not includible while computing the totalincome as these are exempt under various provisions of the Act.There have been cases where deductions have been claimed inrespect of such exempt income. This in effect means that the taxincentive given by way of exemptions to certain categories ofincome is being used to reduce also the tax payable on the non-Bexempt income by debiting the expenses incurred to earn theexempt income against taxable income. This is against the basicprinciples of taxation whereby only the net income, i.e., grossincome minus the expenditure, is taxed. On the same analogy, theexemption is also in respect of the net income. Expenses incurredCcan be allowed only to the extent they are relatable to the earningof taxable income. It is proposed to insert a new section 14A soas to clarify the intention of the Legislature since the inception ofthe Income-tax Act, 1961, that no deduction shall be made inrespect of any expenditure incurred by the assessee in relation toincome which does not form part of the total income under theDIncome-tax Act. The proposed amendment will take effectretrospectively from 1st April, 1962 and will accordingly, apply inrelation to the assessment year 1962-1963 and subsequentassessment years.”

16. Section 14A being retrospective in operation w.e.f. 01.04.1962,Ewas being used by the Assessing Officers for reopening the assessments,the Central Board of Direct Taxes came with a clarification vide CircularNo. 11 of 2001 dated 23.07.2001. Para 4 of the Circular stated asfollows:- “The Board have considered this matter and hereby directs thatFthe assessments where the proceedings have become final beforethe first day of April, 2001 should not be re-opened under section147 of the Act to disallow expenditure incurred to earn exemptincome by applying the provisions of newly inserted section 14Aof the Act.”

G17. By Finance Act, 2002, a statutory provision was also insertedby way of proviso to Section 14A. What was clarified by the Circularhave been statutorily engrafted in the proviso to the following effect:- “Provided that nothing contained in this section shall empower

the assessing officer either to reassess under section 147 or passan order enhancing the assessment or reducing a refund alreadymade or otherwise increasing the liability of the assessee undersection 154, for any assessment year beginning on or before theIst day of April, 2001.”

18. By Finance Act, 2006, Section 14A was numbered as sub-section (1) and after sub-section (1) sub-sections (2) and (3) wereinserted w.e.f. 01.04.2007 to the following effect:- “(2) The Assessing Officer shall determine the amount ofexpenditure incurred in relation to such income which does notform part of the total income under this Act in accordance withsuch method as may be prescribed, if the Assessing Officer, havingregard to the accounts of the assessee, is not satisfied with thecorrectness of the claim of the assessee in respect of suchexpenditure in relation to income which does not form part of thetotal income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation toa case where an assessee claims that no expenditure has beenincurred by him in relation to income which does not form part ofthe total income under this Act.”

19. Memorandum explaining the provisions in Finance Bill, 2006in reference to the method for allocating expenditure in relation to exemptincome mentioned following:- “Under the existing provisions of the said section, it has beenprovided that for the purposes of computing the total income, nodeduction shall be allowed in respect of expenditure incurred bythe assessee in relation to income which does not form part of thetotal income under the Income-tax Act.

It is proposed to number the said section as sub-section (1) thereofand to insert a new sub-section (2) in the said section so as toprovide that the Assessing Officer shall determine the amount ofexpenditure incurred in relation to such income which does notform part of the total income, in accordance with such method asmay be laid down by the Central Board of Direct Taxes by rules,if the Assessing Officer having regard to the accounts of theassessee, is not satisfied with the correctness of the claim of the A

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assessee in respect of expenditure in relation to income whichdoes not form part of the total income. It is also proposed to providethat provisions of sub-section (2) shall also apply in relation to acase where an assessee claims that no expenditure has beenincurred by him in relation to income which does not form part ofthe total income.

This amendment will take effect from 1st April, 2007 and will,accordingly, apply in relation to the assessment year 2007-08 andsubsequent 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 Para11 of the Circular gave following explanation:- “11.1 Section 14A of the Income-tax Act, 1961, provides that forthe purposes of computing the total income under Chapter-IV ofthe said Act, no deduction shall be allowed in respect of expenditureincurred by the assessee in relation to income which does notform part of the total income under the Income-tax Act. In theexisting provisions of section 14A, however, no method ofcomputing the expenditure incurred in relation to income whichdoes not form part of the total income has been provided for.Consequently, there is considerable dispute between the taxpayersand the Department on the method of determining suchexpenditure.

11.2 In view of the above, a new sub-section (2) has been insertedin section 14A so as to provide that it would be mandatory for theAssessing Officer to determine the amount of expenditure incurredin relation to such income which does not form part of the totalincome in accordance with such method as may be prescribed.However, the Assessing Officer shall follow the prescribed methodif, having regard to the accounts of the assessee, he is not satisfiedwith the correctness of the claim of the assessee in respect ofexpenditure in relation to income which does not form part of thetotal income. Provisions of sub-section (2), will also be applicablein relation to a case where an assessee claims that no expenditurehas been incurred by him in relation to income which does notform part of the total income.

11.3 Applicability - From assessment year 2007-08 onwards.”

21. Income Tax Rules, 1962 were amended by notification dated24.03.2008 by which Rule 8D was inserted to the following effect:- “Method for determining amount of expenditure in relationto income not includible in total income.

8D (1) Where the Assessing Officer, having regard to the accountsof the assessee of a previous year, is not satisfied with –

(a) the correctness of the claim of expenditure made by theassessee; or (b) the claim made by the assessee that no expenditure hasbeen incurred in relation to income which does not form part of the total incomeunder the Act for such previous year, he shall determine the amountof expenditure in relation to such income in accordance with theprovisions of sub-rule (2).

(2) The expenditure in relation to income which does not formpart of the total income shall be the aggregate of followingamounts, namely :—

(i) the amount of expenditure directly relating to income whichdoes not form part of total income;

(ii) in a case where the assessee has incurred expenditure byway of interest during the previous year which is not directlyattributable to any particular income or receipt, an amountcomputed in accordance with the following formula, namely :—

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Where A= amount of expenditure by way of interest other thanthe amount of interest included in clause (i) incurred duringthe previous year; B= the average of value of investment, income from whichdoes not or shall not form part of the total income, asappearing in the balance sheet of the assessee, on the firstday and the last day of the previous year ; C= the average of total assets as appearing in the balance A

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sheet of the assessee, on the first day and the last day ofthe previous year;

(iii) an amount equal to one-half per cent of the average ofthe value of investment, income from which does not or shallnot form part of the total income, as appearing in the balancesheet of the assessee, on the first day and the last day of theprevious year.”

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3. For the purposes of this rule, the ‘total assets’ shall mean, totalassets as appearing in the balance sheet excluding the increaseon account of revaluation of assets but including the decrease onaccount of revaluation of assets.”

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22. After setting out the legislative scheme of Section 14A andRule 8D, now, we proceed to consider the submissions raised by learnedcounsel for the parties on the question in issue.

Important Principles of Statutory Interpretation D

23. The legislature has plenary power of legislation within thefields assigned to them, it may legislate prospectively as well asretrospectively. It is a settled principle of statutory construction that everystatute is prima facie prospective unless it is expressly or by necessaryimplications made to have retrospective operations. Legal Maxim “novaEconstitutio futuris formam imponere debet non praeteritis”, i.e. ‘anew law ought to regulate what is to follow, not the past’, contain aprinciple of presumption of prospectivity of a statute.

24. Justice G.P. Singh in “Principles of Statutory Interpretation”(14[th] Edition, in Chapter 6) while dealing with operation of fiscal statuteFelaborates the principles of statutory interpretation in the following words:

“Fiscal legislation imposing liability is generally governedby the normal presumption that it is not retrospective and it isa cardinal principle of the tax law that the law to be appliedis that in force in the assessment year unless otherwiseprovided expressly or by necessary implication. The aboverule applies to the charging section and other substantiveprovisions such as a provision imposing penalty and doesnot apply to machinery or procedural provisions of a taxingAct which are generally retrospective and apply even topending proceedings. But a procedural provision, as far as G

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possible, will not be so construed as to affect finality of taxassessment or to open up liability which had become barred.Assessment creates a vested right and an assessee cannot besubjected to reassessment unless a provision to that effectinserted by amendment is either is either expressly or bynecessary implication retrospective. A provision which in termsis retrospective and has the effect of opening up liability whichhad become barred by lapse of time, will be subject to therule of strict construction. In the absence of a clear implicationsuch a legislation will not be given a greater retrospectivitythan is expressly mentioned; nor will it be construed toauthorize the Income-tax Authorities to commence proceedingswhich, before the new Act came into force, had by the expiryof the period then provided become barred. But unambiguouslanguage must be given effect to, even if it results in reopeningof assessments which had become final after expiry of theperiod earlier provided for reopening them. There is no fixedformula for the expression of legislative intent to giveretrospectivity 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 bytime and sanctified by judicial decisions that, unless the termsof a statute expressly so provide or necessarily require it,retrospective operation should not be given to a statute so asto take away or impair an existing right or create a newobligation or impose a new liability otherwise than as regardsmatters of procedure. The general rule as stated by Halsburyin Vol. 36 of the Laws of England (3rd Edn.) and reiterated inseveral decisions of this Court as well as English courts isthat “all statutes other than those which are merely declaratoryor which relate only to matters of procedure or of evidenceare prima facie prospective”

and retrospective operation should not be given to a statuteso as to affect, alter or destroy an existing right or create A

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a new liability or obligation unless that effect cannot beavoided without doing violence to the language of theenactment. If the enactment is expressed in language whichis fairly capable of either interpretation, it ought to beconstrued as prospective only. If we apply this principleof interpretation, it is clear that sub-section (6) of Section171 applies only to a situation where the assessment of aHindu undivided family is completed under Section 143 orSection 144 of the new Act. It can have no applicationwhere the assessment of a Hindu undivided family iscompleted under the corresponding provisions of the oldAct. Such a case would be governed by Section 25-A ofthe old Act which does not impose any personal liabilityon the members in case of partial partition and to construesub-section (6) of Section 171 as applicable in such a casewith consequential effect of casting of the members personalliability which did not exist under Section 25-A, would beto give retrospective operation to sub-section (6) of Section171 which is not warranted either by the express languageof that provision or by necessary implication. Sub-section(6) of Section 171 can be given full effect by interpretingit as applicable only in a case where the assessment of aHindu undivided family is made under Section 143 orSection 144 of the new Act. We cannot, therefore,consistently with the rule of interpretation which deniesretrospective operation to a statute which has the effect ofcreating or imposing a new obligation or liability, construesub-section (6) of Section 171 as embracing a case whereassessment of a Hindu undivided family is made under theprovisions of the old Act. Here in the present case, theassessments of the Hindu undivided family for AssessmentYears 1950-51 to 1956-57 were completed in accordancewith the provisions of the old Act which included Section25-A and the Income Tax Officer was, therefore, not entitledto avail of the provision enacted in sub-section (6) readwith sub-section (7) of Section 171 of the new Act for thepurpose of recovering the tax or any part thereofpersonally from any members of the joint family includingthe petitioners.”

26. A Constitution Bench of this court speaking through one of us,Dr. Justice A.K.Sikri, in the case of The Commissioner of IncomeTax(Central – 1 New Delhi) Vs. Vatika Township Pvt. Ltd., 2015 (1)SCC 1, while considering as to whether Proviso inserted in Section 113of 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 and33:

“28. Of the various rules guiding how legislation has to beinterpreted, one established rule is that unless a contraryintention appears, a legislation is presumed not to be intendedto have a retrospective operation. The idea behind the rule isthat a current law should govern current activities. Law passedtoday cannot apply to the events of the past. If we do somethingtoday, we do it keeping in view the law of today and in forceand not tomorrow’s backward adjustment of it. Our belief inthe nature of the law is founded on the bedrock that everyhuman being is entitled to arrange his affairs by relying onthe existing law and should not find that his plans have beenretrospectively upset. This principle of law is known as lexprospicit non respicit: law looks forward not backward. Aswas observed in Phillips v. Eyre[6], a retrospective legislation

is contrary to the general principle that legislation by whichthe conduct of mankind is to be regulated when introducedfor the first time to deal with future acts ought not to changethe character of past transactions carried on upon the faithof the then existing law.

29. The obvious basis of the principle against retrospectivityis the principle of “fairness”, which must be the basis of everylegal rule as was observed in L’Office Cherifien desPhosphates v. Yamashita-Shinnihon Steamship Co. Ltd.[7]Thus,legislations which modified accrued rights or which imposeobligations or impose new duties or attach a new disabilityhave to be treated as prospective unless the legislative intentis clearly to give the enactment a retrospective effect; unlessthe legislation is for purpose of supplying an obvious omissionin a former legislation or to explain a former legislation. Weneed not note the cornucopia of case law available on the A

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subject because aforesaid legal position clearly emerges fromthe various decisions and this legal position was concededby the counsel for the parties. In any case, we shall refer tofew judgments containing this dicta, a little later.

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33. A Constitution Bench of this Court in Keshavlal JethalalShah v. Mohanlal Bhagwandas, while considering the natureof amendment to Section 29(2) of the Bombay Rents, Hoteland Lodging House Rates Control Act as amended by GujaratAct 18 of 1965, observed as follows: (AIR p. 1339, para 8)

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“8. … The amending clause does not seek to explain anypre-existing legislation which was ambiguous or defective.The power of the High Court to entertain a petition forexercising revisional jurisdiction was before the amendmentderived from Section 115 of the Code of Civil Procedure,and the legislature has by the amending Act not attemptedto explain the meaning of that provision. An explanatoryAct is generally passed to supply an obvious omission orto clear up doubts as to the meaning of the previous Act.”

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27. A two-Judge Bench, speaking through one of us, Dr. JusticeA. K. Sikri in Jayam and company Vs. Assistant Commissioner &Ors., (2016) 15 SCC 125, again reiterated the broad legal principleswhile testing a retrospective statute in Paragraphs 14 and 18 which is tothe following effect:

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“14. With this, let us advert to the issue on retrospectivity. Nodoubt, when it comes to fiscal legislation, the legislature haspower to make the provision retrospectively. In R.C. TobaccoF(P) Ltd. v. Union of India, this Court stated broad legalprinciples while testing a retrospective statute, in the followingmanner: (SCC pp. 737-38 & 740, paras 21-22 & 28)

“(i) A law cannot be held to be unreasonable merelybecause it operates retrospectively; G

(ii) The unreasonability must lie in some otheradditional factors;

(iii) The retrospective operation of a fiscal statutewouldhave to be found to be unduly oppressive andconfiscatory before it can be held to be unreasonable asto violate constitutional norms; H

(iv) Where taxing statute is plainly discriminatoryor provides no procedural machinery for assessment andlevy of tax or that is confiscatory, courts will be justifiedin striking down the impugned statute as unconstitutional;

(v) The other factors being period of retrospectivityand degree of unforeseen or unforeseeable financialburden imposed for the past period;

(vi) Length of time is not by itself decisive to affectretrospectivity.” (Jayam and Co. case[1], SCC Online Madpara 85)

18. The entire gamut of retrospective operation of fiscalstatutes was revisited by this Court in a Constitution Benchjudgment in CIT v. Vatika Township (P) Ltd. in the followingmanner: (SCC p. 24, paras 33-35)

“33. A Constitution Bench of this Court in Keshavlal JethalalShah v. Mohanlal Bhagwandas, while considering the natureof amendment to Section 29(2) of the Bombay Rents, Hoteland Lodging House Rates Control Act as amended by GujaratAct 18 of 1965, observed as follows: (AIR p. 1339, para 8)

‘8. … The amending clause does not seek to explain anypre-existing legislation which was ambiguous or defective.The power of the High Court to entertain a petition forexercising revisional jurisdiction was before the amendmentderived from Section 115 of the Code of Civil Procedure,and the legislature has by the amending Act not attemptedto explain the meaning of that provision. An explanatoryAct is generally passed to supply an obvious omission orto clear up doubts as to the meaning of the previous Act.’

34. It would also be pertinent to mention that assessmentcreates a vested right and an assessee cannot be subjected toreassessment unless a provision to that effect inserted byamendment is either expressly or by necessary implicationretrospective. (See CED v. M.A. Merchant.)

35. We would also like to reproduce hereunder the followingobservations made by this Court in Govind Das v. ITO, while A

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holding Section 171(6) of the Income Tax Act to be prospectiveand inapplicable for any assessment year prior to 1-4-1962,the date on which the Income Tax Act came into force: (SCCp. 914, para 11)

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‘11. Now it is a well-settled rule of interpretation hallowed byBtime and sanctified by judicial decisions that, unless the termsof a statute expressly so provide or necessarily require it,retrospective operation should not be given to a statute so asto take away or impair an existing right or create a newobligation or impose a new liability otherwise than as regardsmatters of procedure. The general rule as stated by HalsburyCin Vol. 36 of the Laws of England (3rd Edn.) and reiterated inseveral decisions of this Court as well as English courts isthat “all statutes other than those which are merely declaratoryor which relate only to matters of procedure or of evidenceDare prima facie prospective and retrospective operation shouldnot be given to a statute so as to affect, alter or destroy anexisting right or create a new liability or obligation unlessthat effect cannot be avoided without doing violence to thelanguage of the enactment. If the enactment is expressed inElanguage which is fairly capable of either interpretation, itought to be construed as prospective only.”’”

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28. The sub-section (2) and sub-section (3) were inserted in Section14A by Finance Act, 2006. The memorandum explaining the provision inFinance Bill, 2006, in reference to the methods for allocating expenditureFin relation to exempt income as extracted above clearly mentions thatamendments brought by Finance Bill, 2006 will take effect from01.04.2007. The last paragraph of memorandum was to the followingeffect:

“this amendment will take effect from 01.04.2007 and willGaccordingly, apply in relation to the assessment year 2007-08 andsubsequent years”

29. The Constitution Bench of this court in the Commissioner ofIncome Tax and ors. Vs. Vatika Township Pvt. Ltd., (Supra), hastaken into consideration the notes of clause appended to the Finance Bill H

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to decipher the nature of the legislative scheme. In paragraph 42.1,Constitution Bench stated as follows:

“42.1. “Notes on Clauses” appended to the Finance Bill, 2002while proposing insertion of proviso categorically states that“this amendment will take effect from 1-6-2002”. Thesebecome epigraphic[**]words, when seen in contradistinctionto other amendments specifically stating those to beclarificatory or retrospective depicting clear intention of thelegislature. It can be seen from the same Notes that a fewother amendments in the Income Tax Act were made by thesame Finance Act specifically making those amendmentsretrospective. For example, Clause 40 seeks to amend Section92-F. Clause (iii-a) of Section 92-F is amended “so as toclarify that the activities mentioned in the said clause includethe carrying out of any work in pursuance of a contract”(emphasis supplied). This amendment takes effectretrospectively from 1-4-2002. Various other amendments alsotake place retrospectively. The Notes on Clauses show thatthe legislature is fully aware of three concepts:

(i) prospective amendment with effect from a fixed date;

(ii) retrospective amendment with effect from a fixed anteriordate; and

(iii) clarificatory amendments which are retrospective innature.”

30. It is also relevant to know as to how the statutory provisionsof Section 14A sub-section (2) and sub-section (3), Rule 8D wasunderstood by the Income Tax department itself. After insertion of sub-section (2) and sub-section (3) in Section 14A by Finance Bill, 2006,circular dated 28.12.2006 was issued by the department whereinparagraph 11.3, following was stated:

“11.3. Applicability- from assessment year 2007-2008 onwards.”

31. The methodology for determining amount of the expenditurein addition to income not includable in total income was for the first timeprescribed by Rule 8D as was envisaged in Section 14A sub-section (2)and sub-section (3). It is also relevant to notice that Constitution Benchin the Commissioner of Income Tax Vs. Vatika Township Pvt. Ltd., A

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Ahas also referred to and relied the CBDT circular to find out theunderstanding of the Central Board of Direct Tax itself in context ofProvision which was in issue in the above case.

32. Explanatory memorandum issued with the Finance Bill, 2006and the CBDT circular dated 28.12.2006, thus, clearly indicates thatBdepartment understood that sub-section (2) and sub-section (3) was tobe implemented with effect from assessment year 2007-2008. The Rule8D prescribing the method was brought into statute book with effectfrom 24.03.2008 to implement sub-section (2) and sub-section (3) witheffect from assessment year 2008-2009, is clear indicator of the factthat a new method for computing the expenditure was brought in by theCrules which was to be utilized for computing expenditure for theAssessment Year 2008-2009 and onwards.

33. When Section 14A was inserted by Finance Act, 2001, it waswith retrospective effect with effect from 01.04.1962 where as FinanceAct, 2006, by which sub-section (2) and sub-section (3) to Section 14ADwere inserted, it was with effect from 01.04.2006 which was mentionedin clause 1(2) of Finance Act, 2006 which was to the following effect:

“1(2). Save as otherwise provided in this Act, Sections 2 to 57shall be deemed to have come into force on the 1[st] day of April,2006.”ERule 8D which was inserted by notification dated 24.03.2008.Rule 1 sub-rule (2) provides as under:

“1. (1) These rules may be called the Income-tax (FifthAmendment) Rules, 2008.

F(2). They shall come into force from date of their publication inthe Official Gazette.”

It is, however, well settled that the mere date of enforcement ofstatutory provisions does not conclude that the statute is prospective innature. The nature and content of statute have to be looked into to findGout the legislative scheme and the nature, effect and consequence of thestatute.

34. The submissions which have been much pressed by the counselfor revenue is that the Section 14A of the Act being clarificatory innature having retrospective operation, Rule 8D, which is a machinery H

provisions have also to be held to be retrospective to make machineryprovisions workable.

35. It is to be noted that Section 14A was inserted by FinanceAct, 2001 and the provisions were fully workable without their beingany mechanism provided for computing the expenditure. Although Section14A was made effective from 01.04.1962 but Proviso was immediatelyinserted by Finance Act, 2002, providing that Section 14A shall notempower assessing officer either to reassess under Section 147 or passan order enhancing the assessment or reducing a refund already madeor otherwise increasing the liability of the assessees under Section 154,for any assessment year beginning on or before 01.04.2001. Thus, allconcluded transactions prior to 01.04.2001 were made final and notallowed to be re-opened.

36. The memorandum of explanation explaining the provisions ofFinance Act, 2006 has clearly mentioned that Section 14 sub-section (2)and sub-section (3) shall be effective with effect from the assessmentyear 2006-07 alone which is another indicator that provision was intendedto operate prospectively.

37. Learned counsel for the appellant have placed heavy relianceon a three-Judge Bench Judgment of this Court in Commissioner ofWealth Tax, Meerut versus Sharvan Kumar Swarup & Sons, (1994)6 SCC 623. This Court in the above case had to interpret Rule 1-BB,inserted in Wealth Tax, 1957 w.e.f. 01.04.1979. For Assessment Year1977-78 and 1978-79 assessment order was passed on 08.02.1983 bywhich time Rule 1 BB had been introduced in the Rule. The assesseecontended that properties to be valued applying the Rule 1-BB. Theclaim was rejected and Assessing Officer had valued the immovableproperty independently of Rule 1-BB.

38. Appeal preferred by assessee was allowed. Appeal by theRevenue before the Income Tax Appellate Tribunal was also dismissed.High Court also answered the question against the Revenue, which wastaken in appeal before this Court. This Court, after noticing the variousprinciples of “statutory interpretation” held that “procedural law”generally speaking is applicable to pending cases. Interpreting Rule 1-BB following was held in para 23 and 25:

“23. We may now turn to the scope and content of Rule 1-BB.The said rule merely provides a choice amongst well-knownand well-settled modes of valuation. Even in the absence of A

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ARule 1-BB it would not have have been objectionable, norwould there be any legal impediment, to adopt the mode ofvaluation embodied in Rule 1-BB, namely, the method ofcapitalisation of income on a number of years’ purchasevalue. The rule was intended to impart uniformity in valuationsand to avoid vagaries and disparities resulting fromBapplication of different modes of valuation in different caseswhere the nature of the property is similar.”

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25. On a consideration of the matter we are persuaded to theview that Rule 1-BB is essentially a rule of evidence as to thechoice of one of the well accepted methods of valuation inrespect of certain kinds of properties with a view to achievinguniformity in valuation and avoiding disparate valuationsresulting from application of different methods of valuationrespecting properties of a similar nature and character. Theview taken by the High Courts, in our opinion, cannot besaid to be erroneous.”

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39. This Court in the above case held that Rule 1-BB shall beapplicable even prior to the enforcement of the rule holding that the saidrule merely provides a choice amongst well-known and well-settledmodes of valuation. It was held that even in the absence of Rule 1-BB,it would not have been objectionable to adopt the mode of valuationembodied in Rule 1-BB, namely, the mode of capitalisation of income ona number of years purchased value. The said judgment is, clearly,distinguishable in context of issue which has arisen before us. In thepresent case, methodology as provided under Rule 8D was neither awell-known nor well-settled mode of computation. The new mode ofcomputation was brought in place by Rule 8D. No Assessing Officer,even in his imagination could have applied the methodology, which wasbrought in place by Rule 8D. Thus, retrospective operation of Rule 8Dcannot be accepted on the strength of law laid down by this Court in theabove case.

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40. The next judgment relied by the Revenue is Commissionerof Income Tax I, Ahmedabad versus Gold Coin Health Food PrivateLimited, (2008) 9 SCC 622. In the above case, this Court consideredthe amendments made by the Finance Act, 2002 to Section 271(1)(c)(iii)of the Act. This Court held that the Parliament clarified the position bychanging the expression “any” by “if any”, which was not a substantiveH

amendment creating penalty for the first time. The amendment asspecifically noted in the notes of “Clauses” was clarificatory in nature.In para 5 following was laid down:

“5. It is pointed out that prior to the amendment, Section271(1)(c)(iii) read as follows:

“271.(1)(c)(iii) in the cases referred to in clause (c), in additionto any tax payable by him, a sum which shall not be less than,but which shall not exceed twice, the amount of the income inrespect of which the particulars have been concealed orinaccurate particulars have been furnished.”

It was submitted that bare reading of the provision made theposition clear that it was not necessary that income tax mustbe payable by the assessee as sine qua non for imposition ofpenalty. The word “any” made the position clear that thepenalty was in addition to any tax which may be paid by theassessee. Therefore, even if no tax was payable, the penaltywas leviable. It is in that context submitted that even prior tothe amendment it could not be read to mean that if no tax waspayable by the assessee because of filing a return disclosingloss, the assessee is not liable to pay penalty even if theassessee concealed and/or furnished inaccurate particulars.Because some High Courts took the contradictory view,Parliament clarified the position by changing the expression“any’ by “if any”. This was not a substantive amendment whichcreated a penalty for the first time. The amendment by theFinance Act as specifically noted in the Notes on Clausesmakes the position clear that the amendment was clarificatoryin nature and would apply to all assessments even prior toAssessment Year 2003-04.”

41. The three-Judge Bench also referred to Departmental Circulardated 24.07.1976, which was found relevant for interpreting for findingout the nature of the amended provision. The three-Judge Bench, furtherheld in Para 16 to the following effect:

“16. The law is well settled that the applicable provision wouldbe the law as it existed on the date of the filing of the return.It is of relevance to note that when any loss is returned in anyreturn it need not necessarily be the loss of the previous year A

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concerned. It may also include carried-forward loss which isrequired to be set up against future income under Section 72of the Act. Therefore, the applicable law on the date of filingof the return cannot be confined only to the losses of theprevious accounting years.”

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“21. Above being the position, the inevitable conclusion isthat Explanation 4 to Section 271(1)(c) is clarificatory andnot substantive. The view expressed to the contrary in Virtualcase, (2007) 9 SCC 665 is not correct.”

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The above case is also clearly distinguishable and not applicablein the facts of the present case. It was held that amendments wereclarificatory in nature, hence shall operate retrospectively.

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42. The Revenue has also relied on the judgment of this Court inCommissioner of Income Tax-III versus Calcutta Knitwears,Ludhiana, (2014) 6 SCC 444. The above judgment has been relied bythe Revenue for the preposition that it is the duty of the Court, whileinterpreting machinery provisions of a taxing statute to give effect to itsEmanifest purpose. In para 34 following was laid down:

“34. It is the duty of the court while interpreting the machineryprovisions of a taxing statute to give effect to its manifestpurpose. Wherever the intention to impose liability is clear,the courts ought not be hesitant in espousing a commonsenseinterpretation to the machinery provisions so that the chargedoes not fail. The machinery provisions must, no doubt, be soconstrued as would effectuate the object and purpose of thestatute and not defeat the same (Whitney v. IRC, 1926 AC 37(HL), CIT v. Mahaliram Ramjidas, (1940) 8 ITR 442, IndianUnited Mills Ltd. v. Commr. of Excess Profits Tax, (1955) 27ITR 20(SC), and Gursahai Saigal v. CIT,(1963) 48 ITR 1(SC);CWT v. Sharvan Kumar Swarup & Sons, (1994) 6 SCC 623;CIT v. National Taj Traders, (1980) 1 SCC 370; AssociatedCement Co. Ltd. v. CTO, (1981) 4 SCC 578. Francis Bennionin Bennion on Statutory Interpretation, 5th Edn., Lexis Nexisin support of the aforesaid proposition put forth as an F

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illustration that since charge made by the legislator inprocedural provisions is excepted to be for the general benefitof litigants and others, it is presumed that it applies to pendingas well as future proceedings.”

43. There cannot be any dispute to the preposition that machineryprovision of taxing statute has to give effect to its manifest purposes.But the applicability of the machinery provision whether it is prospectiveor retrospective depends on the content and nature of the StatutoryScheme. In the above case, the Court was not considering the questionof prospectivity or retrospectivity of the machinery provision, hence theabove case also does not help the appellant in the present case.

44. The Constitution Bench in Commissioner of Income Tax(Central)-I, New Delhi versus Vatika Township (supra), after noticingthe principle of Statutory Interpretation, as noted above, has laid downthe following in para 36, 37 and 39:

“36. In CIT v. Scindia Steam Navigation Co. Ltd., AIR 1961SC 1633, this Court held that as the liability to pay tax iscomputed according to the law in force at the beginning ofthe assessment year i.e. the first day of April, any change inlaw affecting tax liability after that date though made duringthe currency of the assessment year, unless specifically maderetrospective, does not apply to the assessment for that year.

Answer to the reference

37. When we examine the insertion of proviso in Section 113of the Act, keeping in view the aforesaid principles, ourirresistible conclusion is that the intention of the legislaturewas to make it prospective in nature. This proviso cannot betreated as declaratory/statutory or curative in nature.”

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“39. The first and foremost poser is as to whether it waspossible to make the block assessment with the addition oflevy of surcharge, in the absence of proviso to Section 113?In Suresh N. Gupta itself, it was acknowledged and admittedthat the position prior to the amendment of Section 113 of theAct whereby the proviso was added, whether surcharge waspayable in respect of block assessment or not, was totally A

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ambiguous and unclear. The Court pointed out that someassessing officers had taken the view that no surcharge isleviable. Others were at a loss to apply a particular rate ofsurcharge as they were not clear as to which Finance Act,prescribing such rates, was applicable. It is a matter ofcommon knowledge and is also pointed out that the surchargevaries from year to year. However, the assessing officers wereindeterminative about the date with reference to which ratesprovided for in the Finance Act were to be made applicable.They had four dates before them viz.:(Suresh N. Gupta case,(2008) 4 SCC 362, SCC p. 379, para 35)

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(i) Whether surcharge was leviable with reference to therates provided for in the Finance Act of the year in whichthe search was initiated; or

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(iv) the year in which block assessment order was passed.”

45. As noted above, that Rule 8D has again been amended byIncome Tax (Fourteenth Amendment) Rules, 2016 w.e.f. 02.06.2016,Eby which Rule 8D sub-rule (2) has been substituted by a new provisionwhich is to the following effect:

[(2) The expenditure in relation to income which does notform part of the total income shall be the aggregate offollowing amounts, namely:- F

(i) the amount of expenditure directly relating to incomewhich does not form part of total income; and

(ii) an amount equal to one per cent of the annual averageof the monthly averages of the opening and closingbalances of the value of investment, income from whichdoes not or shall not form part of total income:

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Provided that the amount referred to in clause (i) and clause(ii) shall not exceed the total expenditure claimed by theassessee.]

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46. The method for determining the amount of expenditure broughtin force w.e.f. 24.03.2008 has been given a go-bye and a new methodhas been brought into force w.e.f. 02.06.2016, by interpreting the Rule8D retrospective, there will be a conflict in applicability of 5[th] & 14[th]Amendment Rules which clearly indicates that the Rule has a prospectiveoperation, which has been prospectively changed by adopting anothermethodology.

47. One of the submissions raised by the learned counsel for theassessee also needs to be noticed. Learned counsel for the assesseesubmits that it is well-settled that subordinate legislation ordinarily is notretrospective unless there are clear indication to the same. Reliance hasbeen placed on judgment of this Court in State of Jharkhand & Ors.Vs. Shiv Karampal Sahu, (2009) 11 SCC 453. In para 17 followinghas been stated:

“17. Ordinarily, a subordinate legislation should not beconstrued to be retrospective in operation. The Circular Letterdated 7-5-2003 was given a prospective effect. The father ofthe respondent died on 19-5-2000. There is nothing to showthat even Circular dated 9-8-2000 had been givenretrospective effect. In any view of the matter, as the State ofJharkhand in the Circular Letter dated 7-5-2003 adopted theearlier circular letters issued by the State of Bihar only inrespect of cases where death had occurred after 15-10-2000i.e. the date from which the State of Jharkhand came intobeing, the High Court, in our opinion, committed a seriouserror in giving retrospective effect thereto indirectly which itcould not do directly. Reasons assigned by the High Court,for the reasons aforementioned, are unacceptable.”

There is no indication in Rule 8D to the effect that Rule 8Dintended to apply retrospectively.

48. Applying the principles of statutory interpretation forinterpreting retrospectivity of a fiscal statute and looking into thenature and purpose of sub-section (2) and sub-section (3) of Section14A as well as purpose and intent of Rule 8D coupled with theexplanatory notes in the Finance Bill, 2006 and the departmentalunderstanding as reflected by Circular dated 28.12.2006, we areof the considered opinion that Rule 8D was intended to operateprospectively.

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532SUPREME COURT REPORTS

A49. It is relevant to note that impugned judgment in this appealrelies on earlier judgment of Bombay High Court in Godrej and BoyceManufacturing Company Limited versus Deputy Commissioner ofIncome Tax, Mumbai and Another, (2010) 328 ITR 81 (Bom.), wherethe Division Bench of the Bombay High court after elaboratelyconsidering the principles to determine the prospectivity or retrospectivityBof the amendment has concluded that Rule 8D is prospective in nature.Against the aforesaid judgment of the Bombay High court dated12.08.2010 an appeal was filed in this court which has been decidedvide its judgment reported in Godrej and Boyce ManufacturingCompany Limited Vs. Deputy Commissioner of Income Tax,CMumbai & Anr. (2017) 7 SCC 421. This Court, while deciding theabove appeal repelled the challenge raised by the assessee regardingvires of Section 14A. In para 36 of the judgment, this Court noticed thatwith regard to retrospectivity of provisions Revenue had filed appeal,hence the said question was not gone into the aforesaid appeal. In the above case, this Court specifically left the question of retrospectivity toDbe decided in other appeals filed by the Revenue. We thus haveproceeded to decide the question of retrospectivity of Rule 8D in theseappeals.50. In view of our opinion as expressed above, dismissal of theappeal by the Bombay High Court is fully sustainable. As held above,Ethe Rule 8D is prospective in operation and could not have been appliedto any assessment year prior to Assessment Year 2008-09.

51. In result, all the appeals filed by the Revenue are dismissed.

FDivya Pandey

Appeals of Revenue dismissed.

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