Birla Corporation Ltd. vs Commissioner of Income Tax

The appeal was admitted on 27th Nov., 2009 and the following questions of law were formulated;

(i) Whether the Tribunal was justified in law in holding that the provisions of sub-ss. (2) and (3) inserted in s. 14A of the IT Act, 1961 w.e.f. 1st April, 2007 and r. 8D inserted in the IT Rules, 1962 on 24th March, 2008 were procedural and retrospective and were applicable for the asst. yrs. 2001-02, 2004-05 and 2005-06?

(ii) Whether and in any event the Tribunal was justified in law in holding that it had no jurisdiction to adjudicate upon the legality and/or validity of r. 8D of the IT Rules, 1962?

(iii) Whether the Tribunal was justified in law in not following its order for the asst. yr. 2002-03 and in upholding the disallowance under s. 14A made in the assessments for the asst. yrs. 2001-02 and 2005-06 and that made by the CIT(A) for the assessment year. 2004-05?

As far as the asst. yrs. 2003-04 and 2005-06 we find the following substantial question of law was formulated for decision of this Court:

(1) Whether the learned Tribunal was justified in remanding for rendering fresh decision after having decided the matter by the Tribunal previously with regard to the claim of the assessee relating to proportionate deduction of compensation paid in connection with the mining activity for obtaining raw material limestone to the AO?

At the very outset, Mr. Bajoria, learned senior advocate appearing for the appellant, submitted that he has instruction not to press the sole question relating to the asst. yrs. 2003-04 and 2005-06. Therefore, that question goes out of the arena of consideration and the learned Tribunal''s order in respect thereof is confirmed.

With regard to the asst. yrs. 2001-02, 2004-05 and 2005-06, the aforesaid three questions were pressed. Briefly stated the facts and circumstances of the case are that the AO under s. 14A of the IT Act disallowed expenditure to the extent of a sum of Rs. 5,22,768. Aggrieved by this order, the assessee preferred an appeal. The CIT(A) reduced the aforesaid sum to Rs. 50,000. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before the learned Tribunal. The assessee preferred a cross-appeal. The learned Tribunal held that a Special Bench of the Tribunal, in the case of (2009) 117 ITD 169 , held that r. 8D was procedural in nature and therefore, was retrospective in effect. The learned Tribunal on that basis concluded that since they were bound by the views expressed by the Special Bench and considering that the learned Tribunal was not in a position in law to enhance the amount of expenditure disallowed, they chose to reverse the order passed by the CIT(A). The facts and circumstances with respect to the asst. yrs. 2004-05 and 2005-06 were also identical. In that view of the matter, in all the aforesaid assessment years the orders passed by the CIT(A) were reversed by the learned Tribunal. In this backdrop, the aforesaid appeal was preferred by the assessee and the aforesaid three questions were formulated.

Mr. Bajoria, learned senior advocate appearing in support of the appeal, submitted that r. 8D cannot, by any stretch of imagination, be said to be retrospective in nature. He drew our attention to the views expressed by the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. Vs. Dy. Commissioner of Income Tax, Range 10(2) and Others, , wherein the Division Bench took the following views:

(v) The provisions of r. 8D of the IT Rules which have been notified w.e.f. 24th March, 2008, shall apply w.e.f. the asst. yr. 2008-09;

(vi) Even prior to the asst. yr. 2008-09, when r. 8D was not applicable, the AO has to enforce the provisions of sub-s. (1) of s. 14A. For that purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record.

He also drew our attention to a Division Bench judgment of the Delhi High Court in the case of Maxopp Investment Ltd. Vs. Commissioner of Income Tax, New Delhi, wherein the views expressed by the Bombay High Court was followed and the following views were expressed:

We are of the view that r. 8D would operate prospectively. We agree with the submissions made by Dr. Rakesh Gupta that if the said rule were to have retrospective effect, nothing prevented the CBDT from saying so, particularly, in view of the fact that it had the power to make a rule retrospective by virtue of s. 295(4) of the said Act. Instead of making r. 8D retrospective, cl. 1(2) of the income tax (Fifth Amendment) Rules, 2008, made it clear that the rules would come into force from the date of their publication in the Official Gazette. It is, therefore, clear that r. 8D, which was introduced by virtue of Notification No. 45 of 2008, dt. 24th March, 2008, was prospective in operation and cannot be regarded as being retrospective. We may also point out that we have had the benefit of the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. Vs. Dy. Commissioner of Income Tax, Range 10(2) and Others, , wherein it has, inter alia, been held that the provisions of r. 8D of the said Rules has prospective effect and shall apply w.e.f. the asst. yr. 2008-09 onwards.

Mr. Bajoria also drew our attention to a judgment delivered by the selfsame Tribunal in respect of the self-same assessee for the asst. yr. 2006-07 wherein the self-same Tribunal followed the views expressed by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra). In other words, the Tribunal took the view that r. 8D was not retrospective in nature. The Tribunal in that case also held that disallowance of 1 per cent of the dividend income would be a reasonable amount to be taken into account.

Mr. Bajoria drew our attention to the fact that the aforesaid judgment of the Tribunal was challenged by the Department in an appeal under s. 260A which was admitted by this Bench to which one of us was a party. He submitted that the significant thing is that the question as to whether r. 8D is retrospective in nature was not raised by the Department. Therefore, the Department must be deemed to have accepted the position that r. 8D is only prospective in nature. He added that the Department has to have some consistency in its views and it cannot blow hot and cold at its sweet-will.

Mr. Shome, learned senior advocate appearing for the Department, in his usual fairness, did not dispute the fact that the Department has accepted the position in law that r. 8D is prospective in nature. He, however, submitted that the matter should now be remanded to the AO for recomputing the disallowable expenditure.

Mr. Bajoria has also disputed this submission.

After hearing the learned advocates appearing for the parties, the question No. 1 is answered in the negative and in favour of the assessee. The question Nos. 2 and 3 need not be answered in view of the answer given to the question No. 1

The prayer for remand of the matter to the AO is not allowed because the AO has already applied his mind and thereafter, the CIT(A) has also heard out an appeal against that order. We are as such inclined to remand the matter to the learned Tribunal for decision in the light of the views expressed by us on the aforesaid questions of law. After the judgment was dictated, Mr. Bajoria, learned senior advocate, submitted that since this Court has already taken view that r. 8D is prospective in nature, he has instruction not to press the writ petition being Writ Petn. No. 412 of 2010. The writ petition is, accordingly, dismissed as withdrawn.