SC: Rule 8D of Income Tax Rules has Prospective Operation


February 05, 2018

Commissioner of Income Tax 5 Mumbai v. M/s Essar Tele holdings Ltd.


Date of Judgment: January 31, 2018

In this recent, the Two –Judge Bench of Supreme Court took up a batch of petitions with reference to the common issue:

Whether Rule 8D is retrospectively applicable?”

The main contention of the Appellant in the case was that Section 14A being clarificatory in nature and Rule 8D is a procedural provision which provided only a machinery for the implementation of  Section 14A(2) & (3) of Income Tax Act, Rule 8D is retrospective in nature.  It was also contended that the machinery provisions by which the charging section is to be implemented or workable are to be given retrospective effect.

What is Rule 8D?

Income Tax Rules, 1962 were amended in 2008 by   which   Rule   8D   was   inserted   to provide for the Method   for   determining   amount   of   expenditure   in relation to income not included in total income. Rule 8D was framed to give effect to the provisions of Section 14A(2) & (3) of Income Tax Act. Which enumerates provision for determining the amount of expenditure incurred in relation to such income which does not form part of the total income. Hence, Section 14A(2) & (3) of Income Tax Act is the charging section and Rule 8D is the machinery provision.

Bench’s Verdict

The Supreme Court in the case categorically stated that Rule 8D of the Income Tax Act is prospective in nature. While pronouncing its verdict, the Court made the following key observations in the case:

  • That it is a   settled   principle   of statutory   construction   that   every   statute   is prima facie prospective unless it is expressly or by necessary implications made to have retrospective operation.
  • That mere date if enforcement of statutory provisions does not conclude that the Statute is prospective in nature. That the nature content of statute have to be looked into to find out the legislative scheme and the nature, effect and consequence of the Statute.
  • That the method for determining   the   amount   of   expenditure brought in force w.e.f. 24.03.2008 has been given a go bye and a new method has been brought into force w.e.f. 02.06.2016 by interpreting that Rule 8D is retrospective, there will be conflict in applicability of 5th & 14th amendment Rules which clearly indicate that the Rule has a prospective operation, which   has   been   prospectively   changed   by   adopting   another methodology.
  • That applying the principles of statutory interpretation for interpreting retrospectively of a fiscal statute and looking into the nature and purpose of Section 14A(2) & (3) of Income Tax Act as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and departmental understanding, Rule 8D  was intended to operate prospectively.

The entire case can be accessed here.