By KISHOR KARIA Chartered Accountant ATUL JASANI Advocate
10. CIT vs. Essar Teleholdings Ltd.
(2018) 401 ITR 445 (SC); 31st
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 5th & 14th 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); 13th
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.
