Commissioner of Income-tax 5, Mumbai v. Essar Teleholdings Ltd
[Citation -2018-LL-0131]

Citation 2018-LL-0131
Appellant Name Commissioner of Income-tax 5, Mumbai
Respondent Name Essar Teleholdings Ltd.
Court SUPREME COURT
Relevant Act Income-tax
Date of Order 31/01/2018
Judgment View Judgment
Keyword Tags proportionate interest • addition to income • question of law • legal position • expenditure in relation to income which does not form part of the total income • prospective effect • dividend income • exempted income
Bot Summary: The present batch of cases of which Civil Appeal No. 2165 is a leading case relates only to Question No.2, which is to the following effect: Whether sub section and sub section of Section 14A inserted with effect from 01.04.2007 will apply to all pending assessments Whether Rule 8D is retrospectively applicable 3. Such a case would be governed by Section 25 A of the old Act which does not impose any personal liability on the members in case of partial partition and to construe sub section of Section 171 as applicable in such a case with consequential effect of casting of the members personal liability which did not exist under Section 25 A, would be to give retrospective operation to sub section of Section 171 which is not warranted either by the express language of that provision or by necessary implication. Sub section of Section 171 can be given full effect by interpreting it as applicable only in a case where the assessment of a Hindu 18 undivided family is made under Section 143 or Section 144 of the new Act. After insertion of sub section and sub section in Section 14A by Finance Bill, 2006, circular dated 28.12.2006 was issued by the department wherein paragraph 11.3, following was stated: 11.3. The methodology for determining amount of the expenditure in addition to income not includable in total income was for the first time prescribed by Rule 8D as was envisaged in Section 14A sub section and sub section. Although Section 14A was made effective from 01.04.1962 but Proviso was immediately inserted by Finance Act, 2002, providing that Section 14A shall not empower assessing officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessees under Section 154, for any assessment year beginning on or before 01.04.2001. Applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of sub section and sub section of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively.


REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.2165 OF 2012 COMMISSIONER OF INCOME TAX 5 MUMBAI APPELLANT(S) VERSUS M/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER RESPONDENT(S) WITH C.A.No.........of 2018 @ SLP(C) No. 36560 of 2012, C.A. No. 117 of 2015, C.A. No. 5101 of 2012, C.A. No. 118 of 2015, C.A. No. 6727 of 2015, C.A. No. 119 of 2015, C.A. No. 116 of 2015, C.A. No. 194 of 2015, C.A. No. 114 of 2015, C.A. No. 120 of 2015, C.A. No. 7395 of 2012, C.A. No. 7394 of 2012, C.A. No. 121 of 2015, C.A. No. 122 of 2015, C.A.Nos......... of 2018 @ SLP(C) No. 8507 8509 of 2012, C.A. No. 128 of 2015, C.A.No......... of 2018 @ SLP(C) No. 21294 of 2012 C.A. No. 113 of 20151, C.A. No. 7797 of 2012, C.A. No. 381 of 2013 , C.A. No. 7426 of 2012, C.A. No. 8195 of 2012, C.A. No. 126 of 2015, C.A. No. 8800 of 2012, C.A. No. 3273 of 2013, C.A.No......... of 2018 @ SLP(C) No. 10986 of 2013, C.A. No. 124 of 2015, C.A. No. 1101 of 2013, C.A. No. 129 of 2015, C.A. No. 125 of 2015, C.A. No. 127 of 2015, C.A.No......... of 2018 @ SLP(C) No. 21845 of 2013, C.A. No. 6313 of 2013, C.A. No. 6733 of 2013, C.A. No. 6191 of 2013, C.A. No. 8921 of 2013, C.A. No. 6192 of 2013, C.A. No. 3355 of 2015, C.A. No. 7167 of 2013, C.A. No. 8376 of 2013, C.A. No. 7172 of 2013, C.A. No. 7170 of 2013, C.A. No. 9183 of 2013, C.A. No. 8341 of 2013, C.A. No. 7168 of 2013, C.A. No.8256 of 2013, C.A. No. 7171 of 2013, C.A. No. 7974 Signature Not Verified of 2013, C.A. No. 8342 of 2013, C.A. No. 7173 of 2013, C.A. No. Digitally signed by ASHWANI KUMAR Date: 2018.01.31 8343 of 2013, C.A. No. 8933 of 2013, C.A. No. 8909 of 2013, C.A. 17:00:12 IST Reason: No. 9832 of 2013, C.A. No. 9833 of 2013, C.A. No. 9184 of 2013, C.A. No. 3359 of 2015, C.A.No..............of 2018 @ SLP(C) No. 36388 of 2014, C.A. No. 3781 of 2015, C.A. No. 3358 of 2015 , 2 C.A.No......... of 2018 @ SLP(C) No. 18398 of 2015, C.A. No. 6294 of 2015, C.A.No......... of 2018 @ SLP(C) No. 19303 of 2015, C.A.No......... of 2018 @ SLP(C) No. 20478 of 2015, C.A. No. 7892 of 2015, C.A. No. 9251 of 2015, C.A. No. 9252 of 2015, C.A. No. 14525 of 2015, C.A. No. 8178 of 2016, C.A. No. 8177 of 2016, C.A. No. 3279 of 2016, C.A.No......... of 2018 @ SLP(C) No. 23624 of 2016, C.A.No......... of 2018 @ SLP(C) No. 16185 of 2016, C.A. No. 5044 of 2016, C.A. No. 5417 of 2016, C.A. No. 6019 of 2016, C.A.No......... of 2018 @ SLP(C)No.26278 of 2016, C.A.No......... of 2018 @ SLP(C)No. 4243 of 2017, C.A. No. 4539 of 2017, C.A.No......... of 2018 @ SLP(C) No. 19098 of 2017, C.A.No......... of 2018 @ SLP(C) No. 17499 of 2017, C.A.No......... of 2018 @ SLP(C) No. 25337 of 2017, C.A.No......... of 2018 @ SLP(C)No........of 2018 (Diary No. 19735 of 2017), C.A.No......... of 2018 @ SLP(C)No........ of 2018 (Diary No. 24346 of 2017), C.A.No......... of 2018 @ SLP(C)No.......of 2018,(Diary No. 36596 of 2017). J U D G M E N T ASHOK BHUSHAN, J. Delay Condoned. Leave granted. 2. This appeal when alongwith several appeals were heard on 16.11.2016, this Court noticed that in batch of cases, four questions have arisen. present batch of cases of which Civil Appeal No. 2165 is leading case relates only to Question No.2, which is to following effect: Whether sub section (2) and sub section (3) of Section 14A inserted with effect from 01.04.2007 will apply to all pending assessments? Whether Rule 8D is retrospectively applicable? 3. All these appeals raising only above question of law have 3 been heard together and are being decided by this common judgment. For deciding all these appeals, it shall be sufficient to refer facts and proceedings in Civil Appeal No. 2165 of 2012. FACTS Civil Appeal No. 2165 of 2012 4. This appeal has been filed against judgment of Bombay High Court dated 12.09.2011 in Income Tax Appeal (L) No. 947 of 2011 by which judgment High Court has dismissed appeal filed by Commissioner of Income Tax following earlier judgment of Bombay High Court dated 12.08.2010 in case of Godrej Boyce and Manufacturing Company Limited Vs. Deputy Commissioner of Income Tax, Mumbai & Anr., reported in (2010) 328 ITR 81(Bom.). assessment year in issue is 2003 2004. assessee (respondent in appeal) filed his return of income on 01.12.2003 declaring loss of Rs.69,92,67,527/ . notice under Section 143(2) was issued to assessee. Assessing Officer vide its order dated 27.03.2006 held that during year under consideration, assessee company was in receipt of both taxable and non taxable dividend income. Accordingly, dividend on investment exempt under Section 10(23G) was considered by A.O. for purpose of disallowance U/S.14A. Hence, 4 proportionate interest relating to investment on which exemption u/s.10(23G) is available as per working amounting to Rs.26 crores was disallowed U/S.14A r.w.s. 10(23G) of I.T. Act. 5. assessee filed appeal, which was partly allowed by order dated 05.03.2009. assessee filed appeal before ITAT. ITAT allowed assessee s appeal relying on Bombay High Court s judgment in Godrej and Boyce Manufacturing Company Limited versus Deputy Commissioner of Income Tax, Mumabi & Another., reported in (2010) 328 ITR 81(Bom.). ITAT held that Rule 8D is only prospective and in year under consideration Rule 8D was not applicable. ITAT set aside order of CIT(A) and restored issue back to file of Assessing Officer for de novo adjudication without invoking provisions of Rule 8D. Against order of ITAT, revenue filed appeal before High Court. High Court following its earlier judgment of Godrej and Boyce Manufacturing Company Limited Vs. Deputy Commissioner of Income Tax, Mumbai & Anr. (supra) dismissed appeal. Commissioner of Income Tax aggrieved by judgment of High Court has come up in this appeal. 6. In appeal, only question, which has been pressed 5 for our consideration is first question, which was raised before High Court, which is to following effect: Whether on facts and circumstance of case and in law, Hon ble ITAT is right in holding that applicability of Rule 8D is only prospective in operation and for year under assessment it was not applicable? 7. Thus, in this batch of appeals, only question to be considered and answered is as to whether Rule 8D of Income Tax Rules is prospective in operation as held by High Court or it is retrospective in operation and shall also be applicable in assessment year in question as contended by learned counsel for revenue. 8. We have heard Shri Yashank Adhyaru, learned senior counsel, Shri Arijit Prasad, learned counsel for appellant Shri S.K. Bagaria, learned senior counsel, Shri Ajay Vohra, learned senior counsel and other learned counsel have been heard for different assessees in this batch of appeals. SUBMISSIONS 9. Learned counsel for appellant (revenue) submit that provisions of Section 14A being clarificatory in nature and Rule 8D is procedural provision which provided only machinery for implementation of sub sections (2) and (3), Rule 8D is retrospective in nature. machinery provisions 6 by which charging section is to be implemented or workable are to be given retrospective effect, which is co terminus with period of operation of main charging provision. charging section i.e. Section 14A admittedly being retrospective, machinery provision, i.e. Rule 8D has also to be retrospective. 10. Learned counsel for revenue has placed reliance on judgments of this Court, i.e., Commissioner of Wealth Tax, Meerut Vs. Sharvan Kumar Swarup & Sons, (1994) 6 SCC 623; Commissioner of Income Tax I, Ahmedabad Vs. Gold Coin Health Food Private Limited, (2008) 9 SCC 622 and Commissioner of Income Tax III Vs. Calcutta Knitwears, Ludhiana, (2014) 6 SCC 444. 11. Shri S.K. Bagaria, learned senior counsel appearing for assessee refuting submission of learned counsel for revenue contends that provisions of Rule 8D are only prospective in nature. He submits that when new liability is imposed by statutory provision then same cannot be retrospective. He submits that provisions inserted by Rule 8D are new provision for computing expenditure which can in no manner be retrospective. He submits that Rule 8D was made applicable by Fifth Amendment Rules, 2008 providing in Clause 2 i.e. they shall come into force from date of their 7 publication in official gazette . He submits that Central Board of Direct Taxes vide its circular dated 28.12.2006 while explaining substance of provision of sub sections (2) and (3) of Section 14A clearly mention that aforesaid provisions were to be applicable from assessment year 2007 2008 onwards. Hence, Rule 8D, which is framed to give effect to provisions of sub sections (2) and (3) cannot operate from any date prior to assessment year 2007 2008. 12. Shri Ajay Vohra, learned senior counsel appearing for assessee submits that Rule 8D has been amended by Income Tax (14th Amendment Rules, 2016) w.e.f. 02.06.2016 by which new methodology of computing expenditure in relation to income which does not form part of total income has been brought in place. In event, argument is accepted that Rule 8D is retrospective, which rule shall hold field, whether Rule 8D as inserted w.e.f. 24.03.2008 or one which has been substituted w.e.f. 02.06.2016? amendment made w.e.f. 02.06.2016 reinforces that methodology of computing expenditure in relation to income which does not form part of total income is prospective and has been change w.e.f. 02.06.2016, no other interpretation is permissible. He further submits that subordinate legislation is ordinarily 8 prospective and Rule 8D being subordinate legislation can have no retrospective effect. Learned counsel for assessees have also placed reliance on various decisions of this Court, which shall be referred to while considering submissions in detail. 13. Shri S.S.H. Rizvi, learned counsel appearing for assessee in Civil Appeal arising out of SLP (C) 16185 of 2016 submits that Revenue has already agreed before ITAT that matter be remitted to Assessing Officer for fresh decision in light of judgment of Bombay High Court in Godrej and Boyce Manufacturing Company (supra), hence, it had no jurisdiction to file appeal before High Court. He submits that High Court has rightly dismissed appeal of Revenue, relying on judgment of Bomabay High Court in Godrej and Boyce Manufacturing Company (supra) after noticing fact that no interim order was passed by this Court in Special Leave Petition filed against said judgment. It has been submitted by Shri Rizvi that no other question arose in appeal before High Court hence Revenue has approached this Court by filing this Special Leave Petition without any basis. Relevant Statutory Provisions 14. Rule 8D has been framed to give effect to provisions 9 of Section 14A sub section (2) and (3) of Income Tax Act, 1961 (hereinafter referred to as Act ). statutory scheme as delineated by Section 14A has to be understood before correctly appreciating nature and purport of Rule 8D. Section 14A was first inserted by Finance Act, 2001 with retrospective effect w.e.f. 01.04.1962. Section 14A as originally inserted reads as under: 14A. Expenditure incurred in relation to income not includible in total income. For purposes of computing total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act. 15. purpose for which Section 14A was introduced was given in explanatory memorandum issued with Finance Bill, 2001, which reads sunder: Certain incomes are not includible while computing total income as these are exempt under various provisions of Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that tax incentive given by way of exemptions to certain categories of income is being used to reduce also tax payable on non exempt income by debiting expenses incurred to earn exempt income against taxable income. This is against basic principles of taxation whereby only net income, i.e., gross income minus expenditure, is taxed. On same analogy, exemption is also in respect of net income. Expenses incurred can be allowed only to extent they are relatable to earning of taxable income. It is proposed to insert new section 14A so as to clarify 10 intention of Legislature since inception of Income tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by assessee in relation to income which does not form part of total income under Income tax Act. proposed amendment will take effect retrospectively from 1st April, 1962 and will accordingly, apply in relation to assessment year 1962 1963 and subsequent assessment years. 16. Section 14A being retrospective in operation w.e.f. 01.04.1962, was being used by Assessing Officers for reopening assessments, Central Board of Direct Taxes came with clarification vide Circular No. 11 of 2001 dated 23.07.2001. Para 4 of Circular stated as follows: Board have considered this matter and hereby directs that assessments where proceedings have become final before first day of April, 2001 should not be re opened under section 147 of Act to disallow expenditure incurred to earn exempt income by applying provisions of newly inserted section 14A of Act. 17. By Finance Act, 2002, statutory provision was also inserted by way of proviso to Section 14A. What was clarified by Circular have been statutorily engrafted in proviso to following effect: Provided that nothing contained in this section shall empower assessing officer either to reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154, for any assessment year beginning on or before Ist day of April, 2001. 11 18. By Finance Act, 2006, Section 14A was numbered as sub section (1) and after sub section (1) sub sections (2) and (3) were inserted w.e.f. 01.04.2007 to following effect: "(2) Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed, if Assessing Officer, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. (3) provisions of sub section (2) shall also apply in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under this Act. 19. Memorandum explaining provisions in Finance Bill, 2006 in reference to method for allocating expenditure in relation to exempt income mentioned following: Under existing provisions of said section, it has been provided that for purposes of computing total income, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under Income tax Act. It is proposed to number said section as sub section (1) thereof and to insert new sub section (2) in said section so as to provide that Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total 12 income, in accordance with such method as may be laid down by Central Board of Direct Taxes by rules, if Assessing Officer having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of expenditure in relation to income which does not form part of total income. It is also proposed to provide that provisions of sub section (2) shall also apply in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income. This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to assessment year 2007 08 and subsequent years. 20. After changes made in Section 14A by Finance Act, 2006, Circular No.14/2006 dated 28.12.2006 was issued, in which Para 11 of Circular gave following explanation: 11.1 Section 14A of Income tax Act, 1961, provides that for purposes of computing total income under Chapter IV of said Act, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under Income tax Act. In existing provisions of section 14A, however, no method of computing expenditure incurred in relation to income which does not form part of total income has been provided for. Consequently, there is considerable dispute between taxpayers and Department on method of determining such expenditure. 11.2 In view of above, new sub section (2) has been inserted in section 14A so as to provide that it would be mandatory for Assessing Officer to determine amount of expenditure incurred in relation to such income which does not form part of total income in accordance with such method as may be prescribed. However, 13 Assessing Officer shall follow prescribed method if, having regard to accounts of assessee, he is not satisfied with correctness of claim of assessee in respect of expenditure in relation to income which does not form part of total income. Provisions of sub section (2), will also be applicable in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income. 11.3 Applicability From assessment year 2007 08 onwards. 21. Income Tax Rules, 1962 were amended by notification dated 24.03.2008 by which Rule 8D was inserted to following effect: Method for determining amount of expenditure in relation to income not includible in total income. 8D (1) Where Assessing Officer, having regard to accounts of assessee of previous year, is not satisfied with (a) correctness of claim of expenditure made by assessee; or (b) claim made by assessee that no expenditure has been incurred in relation to income which does not form part of total income under Act for such previous year, he shall determine amount of expenditure in relation to such income in accordance with provisions of sub rule (2). (2) expenditure in relation to income which does not form part of total income shall be aggregate of following amounts, namely : (i) amount of expenditure directly relating to income which does not form part of total income; 14 (ii) in case where assessee has incurred expenditure by way of interest during previous year which is not directly attributable to any particular income or receipt, amount computed in accordance with following formula, namely : B X C Where A= amount of expenditure by way of interest other than amount of interest included in clause (i) incurred during previous year; B= average of value of investment, income from which does not or shall not form part of total income, as appearing in balance sheet of assessee, on first day and last day of previous year ; C= average of total assets as appearing in balance sheet of assessee, on first day and last day of previous year; (iii) amount equal to one half per cent of average of value of investment, income from which does not or shall not form part of total income, as appearing in balance sheet of assessee, on first day and last day of previous year." 3. For purposes of this rule, 'total assets' shall mean, total assets as appearing in balance sheet excluding increase on account of revaluation of assets but including decrease on account of revaluation of assets. 22. After setting out legislative scheme of Section 14A and Rule 8D, now, we proceed to consider submissions raised by learned counsel for parties on question in 15 issue. Important Principles of Statutory Interpretation 23. legislature has plenary power of legislation within fields assigned to them, it may legislate prospectively as well as retrospectively. It is settled principle of statutory construction that every statute is prima facie prospective unless it is expressly or by necessary implications made to have retrospective operations. Legal Maxim nova constitutio futuris formam imponere debet non praeteritis , i.e. new law ought to regulate what is to follow, not past , contain principle of presumption of prospectively of statute. 24. Justice G.P. Singh in Principles of Statutory Interpretation (14th Edition, in Chapter 6) while dealing with operation of fiscal statute elaborates principles of statutory interpretation in following words: Fiscal legislation imposing liability is generally governed by normal presumption that it is not retrospective and it is cardinal principle of tax law that law to be applied is that in force in assessment year unless otherwise provided expressly or by necessary implication. above rule applies to charging section and other substantive provisions such as provision imposing penalty and does not apply to machinery or procedural provisions of taxing Act which are generally 16 retrospective and apply even to pending proceedings. But procedural provision, as far as possible, will not be so construed as to affect finality of tax assessment or to open up liability which had become barred. Assessment creates vested right and assessee cannot be subjected to reassessment unless provision to that effect inserted by amendment is either is either expressly or by necessary implication retrospective. provision which in terms is retrospective and has effect of opening up liability which had become barred by lapse of time, will be subject to rule of strict construction. In absence of clear implication such legislation will not be given greater retrospectivity than is expressly mentioned; nor will it be construed to authorize Income tax Authorities to commence proceedings which, before new Act came into force, had by expiry of period then provided become barred. But unambiguous language must be given effect to, even if it results in reopening of assessments which had become final after expiry of period earlier provided for reopening them. There is no fixed formula for expression of legislative intent to give retrospectivity to taxation enactment...... 25. three Judge Bench of this court in 1976 (1) SCC 906, Govind Das and others Versus Income Tax officer and another, noticing settled rules of interpretation laid down following in paragraph 11: 11. Now it is well settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless terms of statute expressly so provide or necessarily require it, retrospective operation should not be given to statute so as to take away or impair existing right or create new obligation or impose new liability otherwise than as regards matters of procedure. general rule as stated 17 by Halsbury in Vol. 36 of Laws of England (3rd Edn.) and reiterated in several decisions of this Court as well as English courts is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective and retrospective operation should not be given to statute so as to affect, alter or destroy existing right or create new liability or obligation unless that effect cannot be avoided without doing violence to language of enactment. If enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only. If we apply this principle of interpretation, it is clear that sub section (6) of Section 171 applies only to situation where assessment of Hindu undivided family is completed under Section 143 or Section 144 of new Act. It can have no application where assessment of Hindu undivided family is completed under corresponding provisions of old Act. Such case would be governed by Section 25 of old Act which does not impose any personal liability on members in case of partial partition and to construe sub section (6) of Section 171 as applicable in such case with consequential effect of casting of members personal liability which did not exist under Section 25 A, would be to give retrospective operation to sub section (6) of Section 171 which is not warranted either by express language of that provision or by necessary implication. Sub section (6) of Section 171 can be given full effect by interpreting it as applicable only in case where assessment of Hindu 18 undivided family is made under Section 143 or Section 144 of new Act. We cannot, therefore, consistently with rule of interpretation which denies retrospective operation to statute which has effect of creating or imposing new obligation or liability, construe sub section (6) of Section 171 as embracing case where assessment of Hindu undivided family is made under provisions of old Act. Here in present case, assessments of Hindu undivided family for Assessment Years 1950 51 to 1956 57 were completed in accordance with provisions of old Act which included Section 25 and Income Tax Officer was, therefore, not entitled to avail of provision enacted in sub section (6) read with sub section (7) of Section 171 of new Act for purpose of recovering tax or any part thereof personally from any members of joint family including petitioners. 26. Constitution Bench of this court speaking through one of us, Dr. Justice A.K.Sikri, in case of Commissioner of Income Tax(Central 1 New Delhi) Vs. Vatika Township Pvt. Ltd., 2015 (1) SCC 1, while considering as to whether Proviso inserted in Section 113 of Income Tax Act w.e.f. 01.06.2002 is prospective or clarificatory /retrospective noticed general principles concerning retrospectivity. Following was laid down by Constitution Bench in Paras 28, 29 and 33: 28. Of various rules guiding how legislation has to be interpreted, one established rule is that unless contrary intention appears, legislation is presumed not to be intended to have 19 retrospective operation. idea behind rule is that current law should govern current activities. Law passed today cannot apply to events of past. If we do something today, we do it keeping in view law of today and in force and not tomorrow s backward adjustment of it. Our belief in nature of law is founded on bedrock that every human being is entitled to arrange his affairs by relying on existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Phillips v. Eyre6, retrospective legislation is contrary to general principle that legislation by which conduct of mankind is to be regulated when introduced for first time to deal with future acts ought not to change character of past transactions carried on upon faith of then existing law. 29. obvious basis of principle against retrospectivity is principle of fairness , which must be basis of every legal rule as was observed in L Office Cherifien des Phosphates v. Yamashita Shinnihon Steamship Co. Ltd.7 Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach new disability have to be treated as prospective unless legislative intent is clearly to give enactment retrospective effect; unless legislation is for purpose of supplying obvious omission in former legislation or to explain former legislation. We need not note cornucopia of case law available on subject because aforesaid legal position clearly emerges from various decisions and this legal position was conceded by counsel for parties. In any case, we shall refer to few judgments containing this dicta, little later. 33. Constitution Bench of this Court in Keshavlal Jethalal Shah v. Mohanlal Bhagwandas, while considering nature of amendment to 20 Section 29(2) of Bombay Rents, Hotel and Lodging House Rates Control Act as amended by Gujarat Act 18 of 1965, observed as follows: (AIR p. 1339, para 8) 8. amending clause does not seek to explain any pre existing legislation which was ambiguous or defective. power of High Court to entertain petition for exercising revisional jurisdiction was before amendment derived from Section 115 of Code of Civil Procedure, and legislature has by amending Act not attempted to explain meaning of that provision. explanatory Act is generally passed to supply obvious omission or to clear up doubts as to meaning of previous Act. 27. two Judge Bench, speaking through one of us, Dr. Justice A. K. Sikri in Jayam and company Vs. Assistant Commissioner & Ors., (2016) 15 SCC 125, again reiterated broad legal principles while testing retrospective statute in Paragraphs 14 and 18 which is to following effect: 14. With this, let us advert to issue on retrospectivity. No doubt, when it comes to fiscal legislation, legislature has power to make provision retrospectively. In R.C. Tobacco (P) Ltd. v. Union of India, this Court stated broad legal principles while testing retrospective statute, in following manner: (SCC pp. 737 38 & 740, paras 21 22 & 28) (i) law cannot be held to be unreasonable merely because it operates retrospectively; (ii) unreasonability must lie in some other additional factors; (iii) retrospective operation of fiscal statute would have to be found to 21 be unduly oppressive and confiscatory before it can be held to be unreasonable as to violate constitutional norms; (iv) Where taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of tax or that is confiscatory, courts will be justified in striking down impugned statute as unconstitutional; (v) other factors being period of retrospectivity and degree of unforeseen or unforeseeable financial burden imposed for past period; (vi) Length of time is not by itself decisive to affect retrospectivity. (Jayam and Co. case1, SCC Online Mad para 85) 18. entire gamut of retrospective operation of fiscal statutes was revisited by this Court in Constitution Bench judgment in CIT v. Vatika Township (P) Ltd. in following manner: (SCC p. 24, paras 33 35) 33. Constitution Bench of this Court in Keshavlal Jethalal Shah v. Mohanlal Bhagwandas, while considering nature of amendment to Section 29(2) of Bombay Rents, Hotel and Lodging House Rates Control Act as amended by Gujarat Act 18 of 1965, observed as follows: (AIR p. 1339, para 8) 8. amending clause does not seek to explain any pre existing legislation which was ambiguous or defective. power of High Court to entertain petition for exercising revisional jurisdiction was before amendment derived from Section 115 of Code of Civil Procedure, and legislature has by amending Act not attempted to explain meaning of that provision. explanatory Act is generally passed to supply obvious omission or to clear up 22 doubts as to meaning of previous Act. 34. It would also be pertinent to mention that assessment creates vested right and assessee cannot be subjected to reassessment unless provision to that effect inserted by amendment is either expressly or by necessary implication retrospective. (See CED v. M.A. Merchant.) 35. We would also like to reproduce hereunder following observations made by this Court in Govind Das v. ITO, while holding Section 171(6) of Income Tax Act to be prospective and inapplicable for any assessment year prior to 1 4 1962, date on which Income Tax Act came into force: (SCC p. 914, para 11) 11. Now it is well settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless terms of statute expressly so provide or necessarily require it, retrospective operation should not be given to statute so as to take away or impair existing right or create new obligation or impose new liability otherwise than as regards matters of procedure. general rule as stated by Halsbury in Vol. 36 of Laws of England (3rd Edn.) and reiterated in several decisions of this Court as well as English courts is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective and retrospective 23 operation should not be given to statute so as to affect, alter or destroy existing right or create new liability or obligation unless that effect cannot be avoided without doing violence to language of enactment. If enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only. 28. sub section (2) and sub section (3) were inserted in Section 14A by Finance Act, 2006. memorandum explaining provision in Finance Bill, 2006, in reference to methods for allocating expenditure in relation to exempt income as extracted above clearly mentions that amendments brought by Finance Bill, 2006 will take effect from 01.04.2007. last paragraph of memorandum was to following effect: this amendment will take effect from 01.04.2007 and will accordingly, apply in relation to assessment year 2007 08 and subsequent years 29. Constitution Bench of this court in Commissioner of Income Tax and ors. Vs. Vatika Township Pvt. Ltd., (Supra), has taken into consideration notes of clause appended to Finance Bill to decipher nature of legislative scheme. In paragraph 42.1, Constitution Bench stated as follows: 24 42.1. Notes on Clauses appended to Finance Bill, 2002 while proposing insertion of proviso categorically states that this amendment will take effect from 1 6 2002 . These become epigraphic** words, when seen in contradistinction to other amendments specifically stating those to be clarificatory or retrospective depicting clear intention of legislature. It can be seen from same Notes that few other amendments in Income Tax Act were made by same Finance Act specifically making those amendments retrospective. For example, Clause 40 seeks to amend Section 92 F. Clause (iii a) of Section 92 F is amended so as to clarify that activities mentioned in said clause include carrying out of any work in pursuance of contract (emphasis supplied). This amendment takes effect retrospectively from 1 4 2002. Various other amendments also take place retrospectively. Notes on Clauses show that legislature is fully aware of three concepts: (i) prospective amendment with effect from fixed date; (ii) retrospective amendment with effect from fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature. 30. It is also relevant to know as to how statutory provisions of Section 14A sub section (2) and sub section (3), Rule 8D was understood by 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 department wherein paragraph 11.3, following was stated: 11.3. Applicability from assessment year 2007 2008 onwards. 25 31. methodology for determining amount of expenditure in addition to income not includable in total income was for first time prescribed by Rule 8D as was envisaged in Section 14A sub section (2) and sub section (3). It is also relevant to notice that Constitution Bench in Commissioner of Income Tax Vs. Vatika Township Pvt. Ltd., has also referred to and relied CBDT circular to find out understanding of Central Board of Direct Tax itself in context of Provision which was in issue in above case. 32. Explanatory memorandum issued with Finance Bill, 2006 and CBDT circular dated 28.12.2006, thus, clearly indicates that department understood that sub section (2) and sub section (3) was to be implemented with effect from assessment year 2007 2008. Rule 8D prescribing method was brought into statute book with effect from 24.03.2008 to implement sub section (2) and sub section (3) with effect from assessment year 2007 2008, is clear indicator of fact that new method for computing expenditure was brought in by rules which was to be utilized for computing expenditure for Assessment Year 2007 2008 and onwards. 33. When Section 14A was inserted by Finance Act, 2001, it 26 was with retrospective effect with effect from 01.04.1962 where as Finance Act, 2006, by which sub section (2) and sub section (3) to Section 14A were inserted, it was with effect from 01.04.2006 which was mentioned in clause 1(2) of Finance Act, 2006 which was to following effect: 1(2). Save as otherwise provided in this Act, Sections 2 to 57 shall be deemed to have come into force on 1st day of April, 2006. Rule 8D which was inserted by notification dated 24.03.2008. Rule 1 sub rule (2) provides as under: 1. (1) These rules may be called Income tax (Fifth Amendment) Rules, 2008. (2). They shall come into force from date of their publication in Official Gazette. It is, however, well settled that mere date of enforcement of statutory provisions does not conclude that statute is prospective in nature. nature and content of statute have to be looked into to find out legislative scheme and nature, effect and consequence of statute. 34. submissions which have been much pressed by counsel for revenue is that Section 14A of Act being clarificatory in nature having retrospective operation, Rule 8D, which is machinery provisions have also to be held to be retrospective to make machinery provisions workable. 27 35. It is to be noted that Section 14A was inserted by Finance Act, 2001 and provisions were fully workable without their being any mechanism provided for computing expenditure. Although Section 14A was made effective from 01.04.1962 but Proviso was immediately inserted by Finance Act, 2002, providing that Section 14A shall not empower assessing officer either to reassess under Section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessees under Section 154, for any assessment year beginning on or before 01.04.2001. Thus, all concluded transactions prior to 01.04.2001 were made final and not allowed to be re opened. 36. memorandum of explanation explaining provisions of Finance Act, 2006 has clearly mentioned that Section 14 sub section (2) and sub section (3) shall be effective with effect from assessment year 2006 07 alone which is another indicator that provision was intended to operate prospectively. 37. Learned counsel for appellant have placed heavy reliance on three Judge Bench Judgment of this Court in Commissioner of Wealth Tax, Meerut versus Sharvan Kumar Swarup & Sons, (1994) 6 SCC 623. This Court in above case 28 had to interpret Rule 1 BB, inserted in Wealth Tax, 1957 w.e.f. 01.04.1979. For Assessment Year 1977 78 and 1978 79 assessment order was passed on 08.02.1983 by which time Rule 1 BB had been introduced in Rule. assessee contended that properties to be valued applying Rule 1 BB. claim was rejected and Assessing Officer had valued immovable property independently of Rule 1 BB. 38. Appeal preferred by assessee was allowed. Appeal by Revenue before Income Tax Appellate Tribunal was also dismissed. High Court also answered question against Revenue, which was taken in appeal before this Court. This Court, after noticing various principles 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 scope and content of Rule 1 BB. said rule merely provides choice amongst well known and well settled modes of valuation. Even in absence of Rule 1 BB it would not have have been objectionable, nor would there be any legal impediment, to adopt mode of valuation embodied in Rule 1 BB, namely, method of capitalisation of income on number of years' purchase value. rule was intended to impart uniformity in valuations and to avoid vagaries and disparities resulting from application of different modes of valuation in different cases where nature of property is similar. 25. On consideration of matter we are 29 persuaded to view that Rule 1 BB is essentially rule of evidence as to choice of one of well accepted methods of valuation in respect of certain kinds of properties with view to achieving uniformity in valuation and avoiding disparate valuations resulting from application of different methods of valuation respecting properties of similar nature and character. view taken by High Courts, in our opinion, cannot be said to be erroneous. 39. This Court in above case held that Rule 1 BB shall be applicable even prior to enforcement of rule holding that said rule merely provides choice amongst well known and well settled modes of valuation. It was held that even in absence of Rule 1 BB, it would not have been objectionable to adopt mode of valuation embodied in Rule 1 BB, namely, mode of capitalisation of income on number of years purchased value. said judgment is, clearly, distinguishable in context of issue which has arisen before us. In present case, methodology as provided under Rule 8D was neither well known nor well settled mode of computation. new mode of computation was brought in place by Rule 8D. No Assessing Officer, even in his imagination could have applied methodology, which was brought in place by Rule 8B. Thus, retrospective operation of Rule 8B cannot be accepted on strength of law laid down by this Court in above case. 30 40. next judgment relied by Revenue is Commissioner of Income Tax I, Ahmedabad versus Gold Coin Health Food Private Limited, (2008) 9 SCC 622. In above case, this Court considered amendments made by Finance Act, 2002 to Section 271(1)(c)(iii) of Act. This Court held that Parliament clarified position by changing expression any by if any , which was not substantive amendment creating penalty for first time. amendment as specifically noted in notes of Clauses was clarificatory in nature. In para 5 following was laid down: 5. It is pointed out that prior to amendment, Section 271(1)(c)(iii) read as follows: "271.(1)(c)(iii) in cases referred to in clause (c), in addition to any tax payable by him, sum which shall not be less than, but which shall not exceed twice, amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished." It was submitted that bare reading of provision made position clear that it was not necessary that income tax must be payable by assessee as sine qua non for imposition of penalty. word any made position clear that penalty was in addition to any tax which may be paid by assessee. 31 Therefore, even if no tax was payable, penalty was leviable. It is in that context submitted that even prior to amendment it could not be read to mean that if no tax was payable by assessee because of filing return disclosing loss, assessee is not liable to pay penalty even if assessee concealed and/or furnished inaccurate particulars. Because some High Courts took contradictory view, Parliament clarified position by changing expression "any' by "if any". This was not substantive amendment which created penalty for first time. amendment by Finance Act as specifically noted in Notes on Clauses makes position clear that amendment was clarificatory in nature and would apply to all assessments even prior to Assessment Year 2003 04. 41. three Judge Bench also referred to Departmental Circular dated 24.07.1976, which was found relevant for interpreting for finding out nature of amended provision. three Judge Bench, further held in Para 16 to following effect: "16. law is well settled that applicable provision would be law as it existed on date of filing of return. It is of relevance to note that when any loss is returned in any return it need not necessarily be loss of previous year concerned. It may also include carried forward loss which is required to be set up against future income under Section 72 32 of Act. Therefore, applicable law on date of filing of return cannot be confined only to losses of previous accounting years. three Judge Bench, after noticing earlier cases and principles of statutory interpretation recorded following conclusion in para 21: 21. Above being position, inevitable conclusion is that Explanation 4 to Section 271(1)(c) is clarificatory and not substantive. view expressed to contrary in Virtual case, (2007) 9 SCC 665 is not correct. above case is also clearly distinguishable and not applicable in facts of present case. It was held that amendments were clarificatory in nature, hence shall operate retrospectively. 42. Revenue has also relied on judgment of this Court in Commissioner of Income Tax III versus Calcutta Knitwears, Ludhiana, (2014) 6 SCC 444. above judgment has been relied by Revenue for preposition that it is duty of Court, while interpreting machinery provisions of taxing statute to give effect to its manifest purpose. In para 34 following was laid down: 34. It is duty of court while interpreting machinery provisions of taxing statute to give effect to its manifest purpose. Wherever intention to impose liability is clear, courts 33 ought not be hesitant in espousing commonsense interpretation to machinery provisions so that charge does not fail. machinery provisions must, no doubt, be so construed as would effectuate object and purpose of statute and not defeat same (Whitney v. IRC, 1926 AC 37 (HL), CIT v. Mahaliram Ramjidas, (1940) 8 ITR 442, Indian United Mills Ltd. v. Commr. of Excess Profits Tax, (1955) 27 ITR 20(SC), and Gursahai Saigal v. CIT,(1963) 48 ITR 1(SC); CWT v. Sharvan Kumar Swarup & Sons, (1994) 6 SCC 623; CIT v. National Taj Traders, (1980) 1 SCC 370; Associated Cement Co. Ltd. v. CTO, (1981) 4 SCC 578. Francis Bennion in Bennion on Statutory Interpretation, 5th Edn., Lexis Nexis in support of aforesaid proposition put forth as illustration that since charge made by legislator in procedural provisions is excepted to be for general benefit of litigants and others, it is presumed that it applies to pending as well as future proceedings. 43. There cannot be any dispute to preposition that machinery provision of of taxing statute has to give effect to its manifest purposes. But applicability of machinery provision whether it is prospective or retrospective depends on content and nature of Statutory Scheme. In above case, Court was not considering question of prospectivity or retrospectivity of machinery provision, hence above case also does not help appellant in present case. 44. Constitution Bench in Commissioner of Income Tax (Central) I, New Delhi versus Vatika Township (supra), after noticing principle of Statutory Interpretation, as noted 34 above, has laid down following in para 36, 37 and 39: 36. In CIT v. Scindia Steam Navigation Co. Ltd., AIR 1961 SC 1633, this Court held that as liability to pay tax is computed according to law in force at beginning of assessment year i.e. first day of April, any change in law affecting tax liability after that date though made during currency of assessment year, unless specifically made retrospective, does not apply to assessment for that year. Answer to reference 37. When we examine insertion of proviso in Section 113 of Act, keeping in view aforesaid principles, our irresistible conclusion is that intention of legislature was to make it prospective in nature. This proviso cannot be treated as declaratory/statutory or curative in nature. Reasons in support 39. first and foremost poser is as to whether it was possible to make block assessment with addition of levy of surcharge, in absence of proviso to Section 113? In Suresh N. Gupta itself, it was acknowledged and admitted that position prior to amendment of Section 113 of Act whereby proviso was added, whether surcharge was payable in respect of block assessment or not, was totally ambiguous and unclear. Court pointed out that some assessing officers had taken view that no surcharge is leviable. Others were at loss to apply particular rate of surcharge as they were not clear as to which Finance Act, prescribing such 35 rates, was applicable. It is matter of common knowledge and is also pointed out that surcharge varies from year to year. However, assessing officers were indeterminative about date with reference to which rates provided for in 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) (i) Whether surcharge was leviable with reference to rates provided for in Finance Act of year in which search was initiated; or (ii) year in which search was concluded; or (iii) year in which block assessment proceedings under Section 158 BC of Act were initiated; or (iv) year in which block assessment order was passed. 45. As noted above, that Rule 8D has again been amended by Income Tax (Fourteenth Amendment) Rules, 2016 w.e.f. 02.06.2016, by which Rule 8D sub rule (2) has been substituted by new provision which is to following effect: [(2) expenditure in relation to income which does not form part of total income shall be aggregate of following amounts, namely: (i) amount of expenditure directly relating to income which does not form part of total income; and 36 (ii) amount equal to one per cent of annual average of monthly averages of opening and closing balances of value of investment, income from which does not or shall not form part of total income: Provided that amount referred to in clause (i) and clause (ii) shall not exceed total expenditure claimed by assessee.] 46. method for determining amount of expenditure brought in force w.e.f. 24.03.2008 has been given go bye and new method has been brought into force w.e.f. 02.06.2016, by interpreting Rule 8D retrospective, there will be conflict in applicability of 5th & 14th Amendment Rules which clearly indicates that Rule has prospective operation, which has been prospectively changed by adopting another methodology. 47. One of submissions raised by learned counsel for assessee also needs to be noticed. Learned counsel for assessee submits that it is well settled that subordinate legislation ordinarily is not retrospective unless there are clear indication to same. Reliance has been placed on judgment of this Court in State of Jharkhand & Ors. Vs. Shiv Karampal Sahu, (2009) 11 SCC 453. In para 17 following has been stated: 37 17. Ordinarily, subordinate legislation should not be construed to be retrospective in operation. Circular Letter dated 7 5 2003 was given prospective effect. father of respondent died on 19 5 2000. There is nothing to show that even Circular dated 9 8 2000 had been given retrospective effect. In any view of matter, as State of Jharkhand in Circular Letter dated 7 5 2003 adopted earlier circular letters issued by State of Bihar only in respect of cases where death had occurred after 15 10 2000 i.e. date from which State of Jharkhand came into being, High Court, in our opinion, committed serious error in giving retrospective effect thereto indirectly which it could not do directly. Reasons assigned by High Court, for reasons aforementioned, are unacceptable. There is no indication in Rule 8D to effect that Rule 8D intended to apply retrospectively. 48. Applying principles of statutory interpretation for interpreting retrospectivity of fiscal statute and looking into nature and purpose of sub section (2) and sub section (3) of Section 14A as well as purpose and intent of Rule 8D coupled with explanatory notes in Finance Bill, 2006 and departmental understanding as reflected by Circular dated 28.12.2006, we are of considered opinion that Rule 8D was intended to operate prospectively. 49. It is relevant to note that impugned judgment in this appeal relies on earlier judgment of Bombay High Court in 38 Godrej and Boyce Manufacturing Company Limited versus Deputy Commissioner of Income Tax, Mumbai and Another, (2017) 7 SCC 421, where Division Bench of Bombay High court after elaborately considering principles to determine prospectivity or retrospectivity of amendment has concluded that Rule 8D is prospective in nature. Against aforesaid judgment of Bombay High court dated 12.08.2010 appeal was filed in this court which has been decided by vide its judgment reported in Godrej and Boyce Manufacturing Company Limited Vs. Deputy Commissioner of Income Tax, Mumbai & Anr. (2017) 7 SCC 421. This Court, while deciding above appeal repelled challenge raised by assessee regarding vires of Section 14A. In para 36 of judgment, this Court noticed that with regard to retrospectivity of provisions Revenue had filed appeal, hence said question was not gone into aforesaid appeal. In above case, this Court specifically left question of retrospectivity to be decided in other appeals filed by Revenue. We thus have proceeded to decide question of retrospectivity of Rule 8D in these appeals. 50. In view of our opinion as expressed above, dismissal of appeal by Bombay High Court is fully sustainable. As held above, Rule 8D is prospective in operation and could 39 not have been applied to any assessment year prior to Assessment Year 2008 09. 51. In result, all appeals filed by Revenue are dismissed. ..........................J. ( A.K. SIKRI ) ..........................J. ( ASHOK BHUSHAN ) NEW DELHI, JANUARY 31,2018. Commissioner of Income-tax 5, Mumbai v. Essar Teleholdings Ltd
Report Error