Glimpses Of Supreme Court Rulings

10.  CIT vs. Essar Teleholdings Ltd.

(2018) 401 ITR 445 (SC); 31^st January, 2018

Income – Disallowance of expenditure u/s. 14A – Rule 8D was intended to operate prospectively

The Assessee (Respondent in appeal) filed his return of income for the assessment year 2003-2004 on 01.12.2003 declaring a loss of Rs. 69,92,67,527/-. The Assessing Officer vide its order dated 27.03.2006 held that during the year under consideration, the Assessee company was in receipt of both taxable and non-taxable dividend income. Accordingly, the dividend on investment exempt u/s. 10(23G) was considered by the A.O. for the purpose of disallowance u/s. 14A. Hence, proportionate interest    relating   to   investment   on  which  exemption u/s. 10(23G) was available as per the working amounted to Rs. 26 crores was disallowed u/s. 14A r.w.s. 10(23G) of the I.T. Act.

The Assessee filed an appeal, which was partly allowed by order dated 05.03.2009. The Assessee filed an appeal before the ITAT. The ITAT allowed the Assessee’s appeal relying on the Bombay High Court’s judgement in Godrej and Boyce Manufacturing Co. Limited vs. Deputy Commissioner of Income Tax, Mumbai and Anr., reported in (2010) 328 ITR 81(Bom.). The ITAT held that Rule 8D is only prospective and in the year under consideration Rule 8D was not applicable. ITAT set aside the order of CIT(A) and restored the issue back to the file of the Assessing Officer for de novo adjudication without invoking the provisions of Rule 8D. Against the order of ITAT, the revenue filed an appeal before the High Court. The High Court following its earlier judgement of Godrej and Boyce Manufacturing Co. Limited vs. Deputy Commissioner of Income Tax, Mumbai and Anr. (supra) dismissed the appeal. The Commissioner of Income Tax aggrieved by the judgement of the High Court approached the Supreme Court.

According to the Supreme Court, the only question to be considered and answered was as to whether Rule 8D of Income Tax Rules is prospective in operation as held by the High Court or it is retrospective in operation and shall also be applicable in the assessment year in question as contended by the revenue.

The Supreme Court noted that section 14A was inserted by Finance Act, 2001 and the provisions were fully workable without their being any mechanism provided for computing the expenditure. Although section 14A was made effective from 01.04.1962 but proviso was immediately inserted by Finance Act, 2002, providing that section 14A shall not empower assessing officer either to reassess u/s. 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the Assessees u/s.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.

The Supreme Court also noted that the memorandum of explanation explaining the provisions of Finance Act, 2006 clearly mentioned that section 14A sub-section (2) and sub-section (3) shall be effective with effect from the assessment year 2006-07, which according to the Supreme Court was another indicator that provision was intended to operate prospectively.

The Supreme Court observed that the new mode of computation was brought in place by Rule 8D. No Assessing Officer, even in his imagination could have applied the methodology, which was brought in place by Rule 8B. Thus, retrospective operation of Rule 8B cannot be accepted on the strength of law laid down by this Court in CWT vs. Shravan Kumar Swarup & Sons (1994) 210 ITR 886 (SC).

The Supreme Court further noted that Rule 8D had again been amended by Income Tax (Fourteenth Amendment) Rules, 2016 w.e.f. 02.06.2016, by which Rule 8D sub-rule (2) had been substituted by a new provision.

The method for determining the amount of expenditure brought in force w.e.f. 24.03.2008 had been given a go-bye and a new method has been brought into force w.e.f. 02.06.2016.

According to the Supreme Court, by interpreting the Rule 8D retrospective, there would be a conflict in applicability of 5^th & 14^th Amendment Rules which clearly indicated that the Rule was prospective in operation, and had been prospectively changed by adopting another methodology.

The Supreme Court took notice of the submission of the Assessee that it is well-settled that subordinate legislation ordinarily is not retrospective unless there are clear indications to the same.

The Supreme Court held that there was no indication in Rule 8D to the effect that Rule 8D intended to apply retrospectively.

Applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of sub-section (2) and sub-section (3) of section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, the Supreme Court was of the opinion that Rule 8D was intended to operate prospectively.

The appeals filed by the Revenue were therefore dismissed by the Supreme Court.

11.  CIT vs. Rajasthan and Gujarati Foundation

(2018) 402 ITR 441 (SC); 13^th December, 2017

Income of Charitable Trust – income of a charitable trust derived from building, plant and machinery and furniture is to be computed in a normal commercial manner after providing for allowance for normal depreciation and deduction thereof from gross income of the trust – Though the amount spent on acquiring the assets is treated as application of income in the year of acquisition, still depreciation has to be allowed on the same in the subsequent years – Amendment in section 11(6) vide Finance (No.2) Act of 2014 noted.

In a batch of petitions and appeals filed by the IT Department [for various assessment years including assessment year 2006-07 in one of the appeals in which question raised brings out the common controversy] against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the Respondents-assessees, the Supreme Court noted that all the Assessees were charitable institutions registered u/s. 12A of the IT Act. For this reason, in the previous year to the year with which it was concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes u/s. 11(1)(a) of the Act. The view taken by the AO in disallowing the depreciation which was claimed u/s. 32 of the Act was that once the capital expenditure was treated as application of income for charitable purposes, the Assessees had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the Assessee. In most of these cases, the CIT(A) had affirmed the view, but, the Tribunal reversed the same and the High Courts had accepted the decision of the Tribunal thereby dismissing the appeals of the IT Department.

From the judgements of the High Courts, the Supreme Court found that the High Courts had primarily followed the judgment of the Bombay High Court in CIT vs. Institute of Banking Personnel Selection (2003) 264 ITR 110 (Bom). In the said judgement, the contention of the Department predicated on double benefit was turned down. The Supreme Court noted the reference to the decision of the co-ordinate bench in CIT vs. Munisuvrat Jain (1994) Tax LR 1084 (Bom) made by the High Court, in which it was held that income of a charitable trust derived from building, plant and machinery and furniture was liable to be computed in a normal commercial manner to be computed u/s. 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the trust. The Supreme Court also noted the reference to another decision of the co-ordinate bench in the case of Director of IT (Exemption) vs. Framjee Cawasjee Institute (1993) 109 CTR (Bom) 463 made by the High Court, in which the Tribunal, had taken the view that when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as ‘application of income’ of the trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal had been confirmed by the High Court in the above judgement.

The Supreme Court held that the aforesaid view taken by the Bombay High Court correctly stated the principles of law and there was no need to interfere with the same.

The Supreme Court observed that most of the High Courts had taken the aforesaid view with only exception thereto by the High Court of Kerala which had taken a contrary view in Lissie Medical Institutions vs. CIT (2012) 348 ITR 344 (Ker).

The Supreme Court noted that the legislature, realising that there was no specific provision in this behalf in the IT Act, has made amendment in section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the asst. yr. 2015-16. The Supreme Court agreed with the Delhi High Court that the said amendment was prospective in nature.

The Supreme Court clarified that it follows that once Assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.

For the aforesaid reasons, the Supreme Court affirmed the view taken by the High Courts in these cases and dismissed these matters.