Pr. Commissioner Of Income Tax (Central), Gurgaon v. M/S Ind Swift Limited

ITA No.212 of 2017 (O&M) -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.212 of 2017 (O&M)Assessment Year : 2006-07 Decided on : 29.10.2018 Pr. Commissioner of Income Tax (Central), Gurgaon ....... Appellant Versus M/s Ind Swift Limited ...... Respondent 2. ITA No.205 of 2017 (O&M)Assessment Year : 2007-08 Pr. Commissioner of Income Tax (Central), Gurgaon ....... Appellant Versus M/s Ind Swift Limited ...... Respondent CORAM : HON'BLE MR. JUSTICE AJAY KUMAR MITTAL, JUDGEHON'BLE MR. JUSTICE AVNEESH JHINGAN, JUDGEHON'BLE MR. JUSTICE AVNEESH JHINGAN, JUDGE Present :Mr. Rajesh Sethi, Senior Standing Counsel with Mr. Arun Biriwal, Advocatefor the appellant. Mr. Surjit Bhadu, Advocatefor the respondent. * * * AVNEESH JHINGAN, J. This order shall dispose of two appeals bearing ITA Nos.212 and 205 of 2017. Since the facts and the issues involved in both the appeals ITA No.212 of 2017 (O&M) -2- are identical, hence, these are being disposed of by a common order. 2.For sake of convenience, the facts are being extracted from ITANo. 212 of 2017. 3.The revenue has filed the present appeal under Section 260A ofIncome Tax Act, 1961 (for brevity, 'the Act') against the order of IncomeTax Appellate Tribunal, Chandigarh (hereinafter referred to as 'Tribunal')passed in ITA No.511/Chd/2011 dated 28.08.2014 for the assessment year2006-07. 4.Appellant-revenue has claimed following substantial questions of law :- i) Whether on the facts and circumstances of the case, theHon'ble ITAT was justified in restricting thedisallowance made u/s 14A from `1,09,32,198/- to`5 lakhs without any sound and valid reason?Hon'ble ITAT was justified in restricting thedisallowance made u/s 14A from `1,09,32,198/- to`5 lakhs without any sound and valid reason? ii)Whether on the facts and circumstances of the case, theHon'ble ITAT was justified in rejecting the method forcalculation of disallowance u/s 14A provided in Rule 8Djust because the said Rule was inserted from 23.04.2008even if it was a logical method?Hon'ble ITAT was justified in rejecting the method forcalculation of disallowance u/s 14A provided in Rule 8Djust because the said Rule was inserted from 23.04.2008even if it was a logical method? iii)Whether on the facts and circumstances of the case, theHon'ble ITAT was justified in rejecting the method forcalculation of disallowance u/s 14A provided in Rule 8Djust because the said Rule was inserted from 23.04.2008,when this was the prescribed method available in thestatute when the disallowance was made?Hon'ble ITAT was justified in rejecting the method forcalculation of disallowance u/s 14A provided in Rule 8Djust because the said Rule was inserted from 23.04.2008,when this was the prescribed method available in thestatute when the disallowance was made? The facts emanating from the paper-book are that for assessment -ITA No.212 of 2017 (O&M) 3- year 2006-07, the assessee-company filed a return declaring the income of`4,88,99,380/-. Subsequently, a return was filed on 06.06.2007 declaringthe total income of `5,05,07,437/-. The case was selected for scrutiny.Notice under Section 143(2) of the Act was issued on 22.09.2007. Theassessment under Section 143(3) of the Act was finalised vide order dated30.12.2008. Apart from other issues, the Assessing Officer noticed that theassessee had invested a sum of `15,38,82,785/- in share of other companies.The Assessing Officer (AO) invoked the provisions of Section 14A of theAct read with Rule 8D of Income Tax Rules, 1962 (for brevity, 'Rules). TheAO by applying Rule 8D of the Rules worked out the disallowance ofexpenses at `1,09,32,198/-. year 2006-07, the assessee-company filed a return declaring the income of`4,88,99,380/-. Subsequently, a return was filed on 06.06.2007 declaringthe total income of `5,05,07,437/-. The case was selected for scrutiny.Notice under Section 143(2) of the Act was issued on 22.09.2007. Theassessment under Section 143(3) of the Act was finalised vide order dated30.12.2008. Apart from other issues, the Assessing Officer noticed that theassessee had invested a sum of `15,38,82,785/- in share of other companies.The Assessing Officer (AO) invoked the provisions of Section 14A of theAct read with Rule 8D of Income Tax Rules, 1962 (for brevity, 'Rules). TheAO by applying Rule 8D of the Rules worked out the disallowance ofexpenses at `1,09,32,198/-. 6.Against the said order, the assessee-company filed an appealbefore the Commissioner of Income Tax (Appeals), Chandigarh (for brevity,'(CIT(A)'). The First Appellate Authority vide order dated 30.04.2009sustained the additions made by disallowing expenses under Section 14A ofthe Act. The assessee preferred a further appeal before the Tribunal. Theappeal of the assessee was partly allowed vide order dated 28.08.2014. TheTribunal followed the decision of the Bombay High Court in case ofGodrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT, 2010 (328) ITR 81 (Bom)and heldthat Rule 8D of Rules was not applicable during the relevant assessmentyear. The Tribunal, however, held that only a reasonable disallowance can bemade and after considering the facts sustained disallowance of `5 lakhsunder Section 14A of the Act. Hence the present appeal. 7.Heard learned counsel for the parties. 8.Learned counsel for the appellant contended that though Rule8D of Rules was inserted w.e.f. 24.03.2008, however, the Rule provided ITA No.212 of 2017 (O&M) -4- only a guideline for calculation of disallowance of expenditure attributableto exempted income to be made under Section 14A of the Act and hence thedisallowance of `5,00,000/- only sustained by the Tribunal is unjustified. 9.Learned counsel for the assessee-company relied upon thedecision of the Supreme Court in the case ofCommissioner of Income Tax vs. ESSAR Teleholding Ltd., (2018) 401 ITR 445 (SC)and argued that thedecision of the Bombay High Court has been affirmed and it has been heldthat Rule 8D of the Rules is prospective in operation. 10.The pin-pointed issue involved in the present appeal is whetherfor assessment year 2006-07 the assessing Officer could rely upon Rule 8Dof the Rules for working out the disallowance of expenses under Section14A of the Act? 11.The matter is no longer res-integra. The Supreme Court in the case ofESSAR Teleholding Ltd.'s case (supra)held as follows:- “45. As noted above, that Rule 8D has againbeen amended by Income Tax (FourteenthAmendment) Rules, 2016 w.e.f. 02.06.2016, bywhich Rule 8D subrule (2) has been substituted bya new provision which is to the following effect:(2) The expenditure in relation to income whichdoes not form part of the total income shall betheaggregate of following amounts, namely: (i) the amount of expenditure directlyrelating to income which does not form part oftotal income; and (ii) an amount equal to one per cent oftheannual average of the monthly averages of theopening and closingbalances of the value ofinvestment,income from which does not or shallnot form part of total income: -ITA No.212 of 2017 (O&M) 5- Provided that the amount referred to in clause (i)and clause (ii) shall not exceed the totalexpenditure claimed by the assessee.” (i) the amount of expenditure directlyrelating to income which does not form part oftotal income; and (ii) an amount equal to one per cent oftheannual average of the monthly averages of theopening and closingbalances of the value ofinvestment,income from which does not or shallnot form part of total income: -ITA No.212 of 2017 (O&M) 5- Provided that the amount referred to in clause (i)and clause (ii) shall not exceed the totalexpenditure claimed by the assessee.” 46.The method for determining the amount ofexpenditure brought in force w.e.f. 24.03.2008has been given a go bye and a new method hasbeen brought into force w.e.f. 02.06.2016, byinterpreting the Rule 8D retrospective, there willbe a conflict in applicability of 5th & 14thAmendment Rules which clearly indicates that theRule has a prospective operation, which has beenprospectively changed by adopting anothermethodology. 47.One of the submissions raised by the learnedcounsel for the assessee also needs to be noticed.Learned counsel for the assessee submits that it iswell settled that subordinate legislation ordinarilyis not retrospective unless there are clearindication to the same. Reliance has been placedon judgment of this Court in State of Jharkhand& Ors. Vs. ShivKarampal Sahu, (2009) 11 SCC453. In para 17 following has been stated: “17. Ordinarily, a subordinate legislationshouldnot be construed to be retrospectivein operation.The Circular Letter dated752003 was given a prospective effect. Thefather of the respondentdied on 1952000.There is nothing to show that even Circulardated 982000 had been givenretrospectiveeffect. In any view of the matter,as the Stateof Jharkhand in the Circular Letter dated75/2003 adopted the earlier circularletters -ITA No.212 of 2017 (O&M) 6- issued by the State of Bihar only in respectof cases where death had occurred after15.10.2000 i.e. the date from which theState ofJharkhand came into being, theHigh Court, in our opinion, committed aserious error in giving retrospective effectthereto indirectly which itcould not dodirectly. Reasons assigned by the HighCourt, for the reasons aforementioned, areunacceptable.” There is no indication in Rule 8D to the effect thatRule8D intended to apply retrospectively. 48. Applying the principles of statutoryinterpretation for interpreting retrospectivity of afiscal statute and lookinginto the nature andpurpose of subsection(2) and sub section (3) ofSection 14A as well as purpose and intent of Rule8D coupled with the explanatory notes in theFinanceBill, 2006 and the departmentalunderstanding as reflected by Circular dated28.12.2006, we are of the considered opinionthatRule 8D was intended to operate prospectively. 49.It is relevant to note that impugnedjudgment in this appeal relies on earlier judgmentof Bombay High Court inGodrej and Boyce Mfg.Co. Ltd. vs. Dy. CIT, (supra)where the DivisionBench of the Bombay High court after elaboratelyconsidering the principles to determine theprospectivity or retrospectivity of the amendmenthas concluded that Rule 8D is prospective innature. Against the aforesaid judgment of theBombay High court dated 12.08.2010 an appeal -ITA No.212 of 2017 (O&M) 7- 49.It is relevant to note that impugnedjudgment in this appeal relies on earlier judgmentof Bombay High Court inGodrej and Boyce Mfg.Co. Ltd. vs. Dy. CIT, (supra)where the DivisionBench of the Bombay High court after elaboratelyconsidering the principles to determine theprospectivity or retrospectivity of the amendmenthas concluded that Rule 8D is prospective innature. Against the aforesaid judgment of theBombay High court dated 12.08.2010 an appeal -ITA No.212 of 2017 (O&M) 7- was filed in this court which has been decided byvide its judgment reported in Godrej and BoyceMfg. Co. Ltd. vs. Dy. CIT, (2017) 295 CTR (SC)121 : (2017) 151 DTR (SC) 89 : (2017) 7 SCC421.This Court, while deciding the above appealrepelled the challenge raised by the assesseeregarding vires of Section 14A. In para 36 of thejudgment, this Court noticed that with regard toretrospectivity of provisions Revenue had filedappeal, hence the said question was not gone intothe aforesaid appeal. In the above case, this Courtspecifically left the question of retrospectivity tobe decided in other appeals filed by the Revenue.We thus have proceeded to decide the question ofretrospectivity of Rule 8D in these appeals. 50. In view of our opinion as expressed above,dismissal of the appeal by the Bombay High Courtis fully sustainable. As held above, the Rule 8D isprospective in operation and could not have beenapplied to any assessment year prior toAssessment Year 2008-09.” 12.The opinion expressed by the Bombay High Court was upheldlaying down that Rule 8D of the Rules is prospective in operation and couldnot have been applied to any assessment prior to assessment year 2008-09.Hence, the issue is decided against the revenue. 13.As per question No.1 claimed by the appellant whether theTribunal was justified in restricting the disallowance made under Section14A of the Act to `5 lakhs without any sound and valid reason, the sameneed not be gone into as the assessee-company has not challenged the order.Moreover, it would be pertinent to mention here that the AO in the -ITA No.212 of 2017 (O&M) 8- assessment order recorded that there is no prescribed method for working ofdisallowance and thereafter only relied upon Rule 8D of the Rules. 14.No interference is called for in the order passed by the Tribunal.No substantial question of law arises. 15.Consequently, the appeals are dismissed. (AJAY KUMAR MITTAL) JUDGE October 29, 2018anju (AVNEESH JHINGAN) JUDGE Whether speaking/reasoned: Yes Whether reportable :Yes