2019 (1) TMI 960 - HC - Income Tax

Addition u/s 14A r.w.r 8D - whether for assessment year 2006-07 the assessing Officer could rely upon Rule 8D of the Rules for working out the disallowance of expenses under Section 14A of the Act? - Held that - As relying on ESSAR Teleholding Ltd. s case 2018 (2) TMI 115 - SUPREME COURT OF INDIA Rule 8D of the Rules is prospective in operation and could not have been applied to any assessment prior to assessment year 2008-09. Hence, the issue is decided against the revenue.

Summary

Issues:
1. Interpretation of Rule 8D of Income Tax Rules for working out disallowance of expenses under Section 14A of the Income Tax Act for assessment year 2006-07.
2. Justification of restricting the disallowance made under Section 14A to a specific amount without valid reason.

Analysis:

Issue 1: Interpretation of Rule 8D for assessment year 2006-07
The High Court dealt with the issue of whether the Assessing Officer could rely on Rule 8D of the Income Tax Rules for calculating the disallowance of expenses under Section 14A of the Income Tax Act for the assessment year 2006-07. The Court referred to the decision in the case of ESSAR Teleholding Ltd. and highlighted that Rule 8D was amended in 2016, indicating a prospective operation. The Court emphasized that there was no indication in Rule 8D itself to apply retrospectively. The Court further discussed the interpretation of fiscal statutes and concluded that Rule 8D was intended to operate prospectively. The judgment of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT was cited, affirming the prospective nature of Rule 8D. Consequently, the Court held that Rule 8D could not have been applied to any assessment year before 2008-09, deciding the issue against the revenue.

Issue 2: Justification of restricting disallowance under Section 14A
Regarding the question of whether the Tribunal was justified in limiting the disallowance under Section 14A to a specific amount without a valid reason, the Court noted that the assessee had not challenged the order. The Court highlighted that the Assessing Officer had not prescribed any method for disallowance except relying on Rule 8D of the Rules. The Court found no reason to interfere with the Tribunal's decision, stating that no substantial question of law arose. Consequently, the Court dismissed the appeals.

In conclusion, the High Court ruled in favor of interpreting Rule 8D as prospective for the assessment year 2006-07 and upheld the Tribunal's decision to restrict the disallowance made under Section 14A. The judgment provided clarity on the application of Rule 8D and emphasized the importance of following prescribed methods in tax assessments.