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I have written an article on "Rectification of mistakes – whether permissible in case of subsequent contrary decision?"

Section 154 of the Income Tax Act, 1961 provides that any mistake apparent from the record can be rectified by the assessing authority within expiry of four years from the end of the financial year in which the order sought to be amended was passed.  Rectification can be done by the assessing authority on its own or on the same being brought to its notice by the assessee. Various judicial pronouncements have held that the expression "mistake apparent from record" would mean an obivious and patent mistake and on which no further elucidation and/or arguments are required.  Any decision on debatable issue cannot be treated as a mistake apparent from record. However one important question that arises for consideration is can proceedings for rectification of an order be initiated on the basis of contrary view expressed in judgment delivered by the jurisdictional High Court or Supreme Court after the passing of the said order?

Unfortunately on this issue, there are contrary judgments by various high courts and the issue is quite open for the Hon'ble Supreme Court to put it to rest.  I have tried to analyse various judicial pronouncements on this subject.

First point that arises for consideration is in case contrary view is expressed in a judgment delivered by jurisdictional High Court or Supreme Court after passing of a particular order, can it be said that there is "mistake" in that order?

Hon'ble Punjab and Haryana High Court in the case of Commissioner of Income Tax vs. Smt. Aruna Luthra [2001] 170 CTR 0073 (P&H) has held as under:

"In a given case, on interpretation of a provision, an authority can take a view in favour of one of the parties. Subsequent to the order, the jurisdictional High Court or their Lordships of the Supreme Court interpret the same provision and take a contrary view. The apparent effect of the judgment interpreting the provision is that the view taken by the authority is rendered erroneous. It is not in conformity with the provision of the statute. Thus, there is a mistake. Should it still be perpetuated? If the contention raised on behalf of the assessee were accepted, the result would be that even though the order of the authority is contrary to the law declared by the highest Court in the state or the country, still the mistake couldn't be rectified for the reason that the decision is subsequent to the date of the order."
Similarly Hon'ble Kerala High Court in the case of Kil Kotagiri Tea And Coffee Estates Co. Ltd. Vs. Income-tax Appellate Tribunal And Others. [1988] 174 ITR 0579 (Ker) has held as under:

"An order of assessment, based upon an interpretation or application of law which is ultimately found to be wrong in the light of judicial pronouncements rendered subsequently, discloses a mistake apparent from the record".

This takes us to another argument whether the expression "any mistake apparent from the record" means the mistake has to be seen with reference to the date on which the order is passed or even a subsequent contrary view expressed in a judgment can be treated as a "mistake apparent from the record."

In this regard, Hon'ble Punjab and Haryana High Court in the case of Commissioner of Income Tax vs. Smt. Aruna Luthra [2001] 170 CTR 0073 (P&H) have held as under:

"If the issue of error in the order is to be examined only with reference to the date on which it was passed, it may be possible to legitimately contend that it was legal on the date on which it was passed. The subsequent decision has only rendered it erroneous or illegal. However, there was no error much less than an apparent error on the date of its passing. Thus, provision of s. 154 is not applicable. However, such a view shall be possible only if the provision were to provide that the error has to be seen in the order with reference to the date on which it was passed. Such words are not there is the statute. Resultantly, such a restriction cannot be introduced by the Court. Thus, the contention raised by the counsel for the assessee cannot be accepted".

However there are contrary judgments on this point wherein certain High Courts and Tribunals have held that subsequent Supreme Court decision or jurisdictional High Court decision settling a debatable issue would not make the issue undisputed and not debatable on the anterior date and hence rectification u/s.154 under such circumstances is not justified. Jiyajeerao Cotton Mills Ltd. vs. ITO [1981] 130 ITR 0710 (Cal)

This brings us to a very important question whether the judgment of a Court operates prospectively or retrospectively. In case it applies retrospectively, then it cannot be said that there was controversy on the issue on the anterior date and hence rectification u/s. 154 should be permissible. However in case it applies prospectively, then the argument that there was a controversy on the issue on the anterior date becomes stronger and in such a rectification would not be permissible.

Hon'ble Supreme Court in the case of M.A. Murthy vs. State of Karnataka [2003] 185  CTR 194 (SC) has held as under:

"Normally, the decision of this Court enunciating a principle of law is applicable to all cases irrespective its stage of pendency because it is assumed that what is enunciated by the Supreme Court is, in fact, the law from inception".

It further states that "It is for this Court to indicate as to whether the decision in question will operate prospectively. In other words, there shall be no prospective overruling, unless it is so indicated in the particular decision. It is not open to be held that the decision in a particular case will be prospective in its application by application of the doctrine of prospective overruling".

Salmond on Jurisprudence, Tenth Edition, by Glanville L. Williams at page 189 states as follows :
"... the theory of case law is that a judge does not make law; he merely declares it; and the overruling of a previous decision is a declaration that the supposed rule never was law. Hence, any intermediate transactions made on the strength of the supposed rule are governed by the law established in the overruling decision. The overruling is retrospective, except as regards matters that are res judicata, or accounts that have been settled in the meantime."
Hon'ble Punjab and Haryana High Court have in the case of Commissioner of Income Tax Vs. Smt. Aruna Luthra [2001] 170 CTR 0073 (P&H) held as under:

"A Court decides a dispute between the parties. The cause can involve decision on facts. It can also involve a decision on a point of law. Both may have bearing on the ultimate result of the case. When a Court interprets a provision, it decides as to what is the meaning and effect of the words used by the legislature. It is a declaration regarding the statute. In other words, the judgment declares as to what the legislature had said at the time of the promulgation of the law. The declaration is - This was the law. This is the law. This is how the provision shall be construed."

Hon'ble Kerala High Court in the case of Kil Kotagiri Tea And Coffee Estates Co. Ltd. V. Income-tax Appellate Tribunal And Others. [1988] 174 ITR 0579 (Ker) has held as under:

When the court decides a matter, it does not make the law in any sense but all it does is that it interprets the law and states what the law has always been and must be understood to have been. Where an order is made by an authority, on the basis of a particular decision, the reversal of such decision in further proceedings will justify a rectification of the order based on that decision.

Hence from the abovementioned judicial pronouncements, it is amply clear that Courts do not bring any new law into existence, they merely interpret the law as it existed at the time of its enactment into the statute and such law is supposed to operate retrospectively, unless specifically specified by the Court in its order. 

Finally, does this mean that any contrary view expressed in subsequent judgments by jurisdictional High Court or Supreme Court will call for rectification of the orders passed prior to it?

In this regard, recently Hon'ble Supreme Court in the case of Mepco Industries Ltd. Vs. CIT [2009] 319 ITR 208 (SC),  has held as under:
- In case subsequent judgment lays down a principle of law, then it will be applicable across the board and based on the same rectification ,can be done;
- However in case subsequent judgment is based on the facts, then rectification cannot be done in respect of any orders passed prior to it, since that would tantamount to change of opinion and rectification cannot be done in case of change of opinion {in that particular decision, there was no conflict between both Supreme Court decisions and each one had ruled according to the nature of the subsidy involved in their cases.}

Hence from the abovementioned various judicial pronouncements, to me it appears, in matters relating to principle of law, proceedings for rectification of mistakes u/s. 154 can be initiated based on the contrary view taken by the jurisdictional High court or Supreme Court after the passing of that order. We will have to wait for the Supreme Court to finally decide this issue...

Request all of you to kindly share your views on the above.

Under the erstwhile Income Tax Act, 1961, MAT was levied u/s. 115 JB on book profits. The idea of levying MAT on book profits was to ensure that the entity pays tax at least on book profits even though the tax payable by it under the Income Tax Act comes to be lower than tax computed on book profits.  Hence here the basic underlying concept was that the Company has made book profits based on the accounts prepared under the Companies Act. However in case the tax payable under the Income Tax Act (on account of various deductions permissible under the Income Tax Act, 1961) is lower as compared to the tax paid on book profits, then Company has to pay tax on book profits u/s. 115JB. Further credit was available in respect of such excess tax paid by the Companies. Hence this additional tax paid on account of MAT was in the nature of advance tax paid by the Company.

The discussion paper on New Income Tax code unveiled on 11th August 2009 states that base for the tax code should be comprehensive definition of income. It further states that income for the purpose of this code, will, in general, include all accruals and receipts of revenue and capital nature unless other wise specified.

It seeks to introduce MAT in a very different form. It states that several countries have adopted minimum taxes based on a fixed percentage of the assets of a business. The economic rationale for the tax on assets is that investors can expect ex-ante to earn a specified average rate of return on their assets. Therefore, it provides an incentive for efficiency. Accordingly the code provides for Minimum Alternate Tax calculated @ 2% on "value of the gross assets" for Companies other than Banking Companies. It further states that the shift in the MAT base from book profits to gross assets will encourage optimal utilization of the assets and thereby increase efficiency. Hence a Company has to pay higher of the following as tax:
a)   25 % of the total taxable income or,
b)   Minimum alternate tax @ 2% of the value of gross assets (0.25% in case of Banking Companies).

Further it also states that credit of Minimum alternate tax paid by the Companies would not be allowed.

The above provision of taxing Companies by MAT surely has the following lacunas:
a)   Income Tax should always be on accrual/receipt of income and should not be charged on such presumptive basis (without any reference to the income earned).
b)   By not allowing credit of tax paid by way of minimum alternate tax, this tax is in the nature of wealth tax and not on income at all;
c)   This type of tax will clearly be an additional burden to loss making companies and will make their survival more difficult;
d)   In case of long gestation projects, this tax type of tax will further increase the cost of projects and might even make the projects unviable.
e)   This type of tax will be higher in case of highly leveraged companies and capital intensive companies.
f)   This type of presumptive tax will reduce investments in Infrastructure and will dissuade investments.

Hence based on the above, the MAT provisions in its existing form in the New Income Tax code needs serious reconsideration by the Hon'ble Finance Minister.

I have written one article on "Can Tribunal take back what assessing officer has given??"

Sub-section (1) of section 254 of the Income Tax Act, 1961 states as under:

"254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit."

The moot question is whether the Tribunal has the power to enhance the assessment/In other words, can the Tribunal take back what assessing officer has given?

Supreme Court in the case of Hukumchand Mills Ltd. V. Commissioner of Income-tax, Central, Bombay 1967-(063)-ITR -0232 -SC had dealt with the powers of the Tribunal while interpreting section 33(4) of the Income Tax Act, 1922 (equivalent to section 254(1) of the Income Tax Act, 1961) as follows:

"33(4) The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner.
The word "thereon", of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words "pass such orders as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred upon the Appellate Assistant Commissioner by section 31 of the Act".
From the above, it can be clearly seen that there is no blanket restriction on the powers of the Tribunal to enhance the assessment but the restriction on enhancement is in light of the judge – made law, or to put it differently, in light of the ratio decidendi of the binding judicial pronouncements. Further this view has been confirmed by various judicial pronouncements viz., Pathikonda Balasubha Setty (Decd.) Vs. CIT 1967 – 65 – ITR- 252 (Mys), and in the latest Supreme Court judgment in the case of MCorp Global Pvt. Ltd. Vs. Commissioner of Income Tax, Ghaziabad 2009-(222)-CTR -0110 -SC.
Hon'ble Supreme Court in case of State of Kerala Vs. Vijaya stores 1979 116 ITR 15 SC had held that in the case of assesee's appeal, and in absence of cross objection or cross appeal from the revenue, an assessee cannot be worse off as a result of his having carried the matter in appeal before the Tribunal. Further Hon'ble Allahabad High Court in case of Pahulal Ved Prakash Vs. CIT 1990 186 ITR 589 (ALL) had come to the conclusion that "It is settled that the Tribunal, while dealing with an appeal, in the absence of any cross appeal or cross objection, cannot give a finding adverse to the appellant which would make his position even worse than it was against the orders appealed against".
This brings us to another issue as to whether the Tribunal cannot enhance the assessment even if the orders passed by the Assessing officer are not in accordance with the law or there are computational errors in the orders passed by the Assessing Officer?? Hon'ble Supreme Court in the case of CIT Vs. Assam Travel Shipping Service (1993) 199 ITR 1 (SC), after taking note of Hukumchand Mill's case (supra) observed that "The expression 'as it thinks fit' is wide enough to include the powers of remand to the authority competent to make the requisite order in accordance with the law in such a case, even though the Tribunal itself could not have made the order enhancing the penalty". Thus it is clear that though the Tribunal does not have powers of enhancement, in fit cases, it can remit the matter to the file of the CIT(A) or the AO for deciding the matter in accordance with the law irrespective of whether or not the order so being passed in accordance with the law may result in enhancement.  Thus there can be situations in which the assessee ends up paying more, as a result of the matter having been carried in appeal before the Tribunal, than what it would have paid if the AO's order was simply accepted by the assessee. In the case of Assam Travel Shipping Service (supra), the assessee was imposed penalty of Rs. 6,944 under s. 271(1)(a) which was less than the minimum penalty of Rs. 65,700 which could have been imposed on the facts of that case. The first appellate authority cancelled the penalty order on the ground that the penalty imposed is not in accordance with the law. When the matter travelled in appeal before the Tribunal, a view was taken that the penalty imposed by the AO "was not in accordance with the law and since the Tribunal had no rights to enhance the penalty, there was no alternative but to set aside the order of penalty imposed by the ITO and, in that view, the Tribunal upheld the order of the AAC (i.e., the first appellate authority)". While Hon'ble Gauhati High Court upheld this stand of the Tribunal, Hon'ble Supreme Court did not do so. Their Lordships, on the facts of this case, observed that "The expression 'as it thinks fit' is wide enough to include the powers of remand to the authority competent to make the requisite order in accordance with the law in such a case, even though the Tribunal itself could not have made the order enhancing the penalty".  In the light of the above, Tribunal is not always prevented from passing orders which may result in enhancement of the assessee's tax liability beyond the tax liability determined by the AO. In other words, it is not always necessary that as a result of the proceeding following assessee having been carried in appeal, the assessee cannot be worse off vis-a-vis the position in the event of his having simply accepted the order which is so carried in appeal. The rule preventing enhancement of assessee's tax liability, beyond the liability fixed by the AO, is not universal and without exceptions to the said rule. Similar view was expressed by Bombay Tribunal in case of Joint Comissioner of Income Tax Vs. Sakura Bank Ltd. (2006) 100 ITD 0215 T BOM.
Hence from the above, it can clearly be inferred that;

   There is no blanket restriction on the powers of the Tribunal to enhance the assessment as per Section 254(1) of the Income Act, 1961.

   The restriction on enhancement of the assessment by the Tribunal is in light of the binding judicial pronouncements.

   Various judicial pronouncements confirm that in case of assessee's appeal, and in absence of cross objection or cross appeal from the revenue, an assessee cannot be worse off as a result of his having carried the matter in appeal before the Tribunal.

   In case the orders passed by the Assessing Officer are not in accordance with the law or there are computational errors in the orders passed by the Assessing Officer, then the Tribunal, even though does not have the power of enhancement, can remand back the case to the CIT (A) or Assessing Officer for deciding the matter in accordance with the law irrespective of whether or not the order so being passed in accordance with the law may result in enhancement.

Would request you to share your views on this topic. Thanks.

If the Assessing officer or Commissioner (Appeals) in the course of any proceedings under the Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, then he can direct that such person shall pay by way of penalty u/s. 271(1) (c), a sum not less than 100% but not exceeding 300% of the amount tax sought to be evaded by reason of concealment of his income or furnishing inaccurate particulars of his income. This section is used as a sword by the assessing officers. In fact in the orders passed u/s. 143(3) of the Income Tax Act, they have been mentioning "Initiate Penalty proceedings u/s. 271(1) (C) of the I T Act" by default on additions/disallowances done without providing any reasons irrespective of whether the assessee really tried to conceal his income or furnished inaccurate particulars of his income or even if additions/disallowances are on account of legally debatable issues.

There were various judicial pronouncements viz., CIT Vs. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi), Sri. T Ashok Pai Vs. CIT [2007] 292 ITR 011 SC, Shri. Bhagwant Finance Co. Ltd. V. CIT & Anr. (2005) 196 0462 DEL, etc. wherein it had been  held that satisfaction of AO u/s 271(1)(c) is a condition precedent to initiation of penalty proceedings. Penalty proceeding cannot be exercised unless requisite satisfaction is recorded in the proceedings under the act. Non-recording of satisfaction is a jurisdictional defect which cannot be cured. Hence in such cases, penalty proceeding are bad and also subsequent proceedings must fail. However Finance Act 2008 has introduced new sub section (1B) with retrospective effect from 1st April 1989 to nullify the effect of the abovementioned judgements.  It provided that where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and if such order contains a direction for initiation of penalty proceedings, then such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under section 271(1) (c).  Unfortunately this proviso has come as another weapon in the hands of the assessing officers. They do have not have to record any satisfaction for initiating the penalty proceedings.
Further Larger Bench of Supreme Court in case of Union of India and Ors., vs. M/s. Dharmendra textile processors and Ors. 306 ITR 227 while reversing the supreme court judgement of Dilip N Shroff Vs. Joint CIT, Special Range, Mumbai 291 ITR 519 has held that "It is a well-settled principle in law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent". Also it has further held that "The Explanations appended to Section 271(1)(c) of the IT Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N. Shroff's case (supra) has not considered the effect and relevance of Section 276C of the I.T. Act. Object behind enactment of Section 271(1)(c) read with Explantations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the I.T. Act". Hence the supreme court in this judgement has concluded that '' Mens Rea'' or ''Wilful concealment'' is not a criteria for determining leviability of penalty. However with due respect of the judgement of the Hon'ble Supreme Court, I feel that Supreme Court ought to have appreciated the adhoc manner in which penalty proceedings are by default initiated by the assessing officers on the additions/disallowances done in the assessment orders. The assessees genuinely had a strong and quite logical ground to argue and prove that there was no intention to conceal/furnish inaccurate particulars and additions are merely differences of opinion between the assessing officer and the assessee.
Further today in the online E – filing of returns, there is no place to include any notes to Income tax return or to include any explanations in respect of any legal position taken by the assessee on a specific claim while filing the return of income. Under Income Tax Act, there are many issues which are debatable and hence assessee takes a legal position based on judicial pronouncements existing at the time of filing returns. An assessee would prefer making a claim in a transparent manner by providing on record all relevant facts, reasonings and judicial pronouncments considered while deciding on the making a claim. However in absence of an opportunity to submit such a explanation (thru online e filing of returns), assessee is clearly losing the opportunity to provide proper explanations and is exposed to the vagaries of penalties levied by the assessing officers whimsically even on the genuine claims made by the assessee.
Based on the above, in today's scenario, it appears that once additions/disallowances are made in the assessment orders, there is no onus on the department to prove that assessee has concealed his income or furnished inaccurate particulars. The onus is entirely on the assessee to prove his bonafides. The assessing officers merrily just have to mention " Initiate Penalty proceedings  u/s 271(1)(c) of the I T Act".
I feel in today's world where transparency and governance are provided highest ratings, to make the law fair and just for the assessees:
o   Assessing Officers should mandatorily provide reasons for initiation of penalty proceedings. This will also bring discipline with the assessing officers to genuinely initiate penalty proceedings where assessee has really concealed his income or has furnished inaccurate particulars and avoid to some extent ill – motivated initiating of penalty proceedings.  Penalty proceedings should not be just be initiated on each and every additions/disallowances made in the assessment order.
o   Penalty provision requires strict adherence and hence the onus to prove that there was concealment of income with a view to avoid tax, should be on the department. Penalty should only be levied in cases where mens rea exists.
o   Opportunity should be provided at the time of filing return of income to the assesseee to provide full explanations and reasonings in respect of the claims made in the Income Tax Return.
This would certainly help the genuine and honest tax payers in the long way and at the same time provide department with a level playing opportunity to prove in case assessee has really concealed the income or has furnished inaccurate particulars.

Request you to kindly share your views on this. Thanks.

I have written an article on "Rule 8D - Prospective or Retrospective"

Rule 8D of the Income Tax Act – Prospective or Retrospective..

Section 14A was introduced in the Income Tax Act, 1961 by the Finance Act 2001 with retrospective effect from 1st April 1962. The intent of introducing this section was reiteration of the well settled legal principle that when an assessee incurs any expenditure in relation to income which is not liable

to tax under the Act, he would ideally not be allowed the benefit of claiming such expenditure. The need for introduction of this section had arisen to negate the decision of Supreme Court in Rajasthan State Warehousing Corporation vs. CIT [2000] ITR 450.

Section 14A was amended by the Finance Act 2006 wherein subsec

tion (2) and (3) were introduced stating that the assessing officer shall determine the amount of expenditure incurred in relation to such income which is not liable to tax in accordance with the method as prescribed if the assessing officer is not

satisfied with the correctness of claim of the assessee in respect of such expenditure incurred in relation to income which does not form part of taxable income or where the assessee claims that no expenditure has been incurred by

him in relation to such income. Hence it is very evident that under the Income tax Act, method of computation of disallowance u/s. 14A was first sought to be provided from 1st April 2007 and not before that. However no such method was prescribed until Rule 8D was introduced in the Income Tax Rules vide Notification No. 45/2008 w.e.f. 24.03.2008.

Hence even after introduction of Section 14A until 24.03.2008, there was no mechanism in the statute to determine the quantum of expenditure that should be subject to disallowance. Arbitrary disallowances were done by the Assessing Officers which were held against the revenue by Various High Court and Tribunal Judgements. However after introduction of Rule 8D in the Income Tax Rules w.e.f. 24.03.2008, Mumbai Tribunal Special Bench in case of ITO Vs. Daga Capital Management Pvt. Ltd [2008] 26 SOT 603 has held that Rule 8D applies retrospectively in respect of pending appeals. Also the assessing officers have been applying Rule 8D in respect of pending assessments prior to A.Y. 2008 – 2009. The moot question is since no method for computing disallowances u/s. 14A was provided prior to 1st April 2007/24th March 2008, whether Rule 8D prescribed on 24th March 2008 can be applied in respect of pending assessments/appeals prior to A.Y. 2008 – 2009?

Rule 8D was introduced in the Income Tax Rules vide notification no. 45 of 2008 dtd. 24th March 2008 (The Income – Tax (Fifth Amendment) Rules, 2008. The notification stated that the rules shall come into force on the date of their publication in the official gazette.

- Section 295 of the Income Tax Act gives power to the Board to make rules. Further subsection (4) of section 295 does give the power to the Board to give retrospective effect to any rule, but it also at the same time puts a restriction that no retrospective effect shall be given to any rule if it tends to prejudicially affect the interests of the assessee.  In this case, if Rule 8D is applied retrospectively for pending assessments/appeals prior to A.Y. 2008 – 2009, then it might prejudicially affect the interests of the assessee. (mainly on account of third limb of the rule seeking to arbitrarily bring one half percent of the average value of the investment within the purview of Section 14A irrespective of the expenditure incurred against earning income from such investments).

- Bombay High Court in the case of Commissioner of Income Tax Vs. Mirza Ataullaha Baig and another [1993] 202 ITR 291 – BOM, had held that:

"Firstly, it is submitted that the amendment made on July 24, 1980, should be deemed to the retrospective in its operation. We find it difficult to accept this submission because the Income-tax Act itself, while conferring rule making power on the Board, has empowered the Board by making specific provision in section 295(4), to give retrospective effect to any rule. This power is subject to the only restriction that no retrospective effect should be given to any rule so as to prejudicially affect the interest of the assessee. If the Board wanted to make amendment in the rule made by it on July 24, 1980, applicable to the assessment year 1980-81, it could have made the amendments in the rules made by it on July 24, 1980, applicable to the assessment year 1980-81, it could have made the amendment Rules effective from 1st April, 1980, instead of bringing them into force "at once" thoughts from the date of notification which was July 24, 1980. The purpose of bringing the amendment into operation with immediate effect evidently was to make it known to the assessee that for the next assessment year they would be entitled to get depreciation at the rate of 40 per cent and also to enable them to compute their advance tax liability accordingly". Hence this judgement clearly indicated that in case the notification comes into effect with immediate effect or "at once", then the purpose of it is to make it known to the assessee this computation would be adopted by Assessing Officer in case of non satisfaction of the claim in future.

- Hon'ble Supreme Court in the case of Shri. B C Srinivas Shetty 128 ITR 294 (SC) held that the charging and the computation provision under the 1961 Act constituted an integrated code. Since no method for computing disallowance was provided prior to 1st April, 2007/24th March, 2008 as per the decision of the Hon'ble Supreme Court in the case of B. C. Srinivas Shetty reported in 128 ITR 294 (SC) followed in CIT vs. Infosys Technologies Ltd. 297 ITR 167 (SC) if the computational provisions fail, no liability can be fastened on the assessee.

- Mumbai Tribunal Special Bench in case of ITO Vs. Daga Capital Management Pvt. Ltd [2008] 26 SOT 603, has held that sub section (2) and (3) of section 14A provide for the procedure for disallowance u/s. 14A and hence relying on the Hon'ble Supreme Court in the case of CIT Vs. Sharwan Kumar Swarup & Others 210 ITR 886, it held that procedural law, generally speaking, is applicable to all pending cases since no person has vested right in the procedure and hence Rule 8D would be applicable to all pending cases.

Let's try to see what was stated in the Hon'ble Supreme Court Judgement in case of CIT Vs. Hon'ble Sharwan Kumar Swarup 210 ITR 886.  Supreme Court in case of CIT Vs. Sharwan Kumar Swarup 210 ITR 886 had held that "We may now turn to the scope and content of rule 1BB.  We may now turn to the scope and content of rule 1BB. The said rule merely provides a choice amongst well-known and well-settled modes of valuation. Even in the absence of rule 1BB it would not have been objectionable, nor would there be any legal impediment, to adopt the mode of valuation embodied in rule 1BB, namely, the method of capitalisation of income on a number of years' purchase value. The rule was intended to impart uniformity in valuations and to avoid vagaries and disparities resulting from application of different modes of valuation in different cases where the nature of the property is similar."

It further held that "On a consideration of the matter, we are persuaded to the view that rule 1BB is essentially a rule of evidence as to the choice of one of the well-accepted methods of valuation in respect of certain kinds of properties with a view to achieving uniformity in valuation and avoiding disparate valuations resulting from application of different methods of valuation respecting properties of a similar nature and character. The view taken by the High Courts, in our opinion, cannot be said to be erroneous".

However the method prescribed under Rule 8D is surely not the choice of one of the well accepted methods for computing expenditure incurred in relation to the income which does not form a part of total Income. In so far as first and second limbs the rule 8D are concerned, no rational minded assessee should have any qualms with the revenue. However, the real problem is the third limb of rule 8D. It seeks to bring one half percentage of the average value of investment, income from which shall not form a part of total income. Hence by no stretch of imagination, notional expenditure at the rate of 0.5% of the average value of such investments can be deemed as expenditure incurred in relation to tax free income generated from an investment in the context of section 14A. Such an mischievous provision also brings to tax those assesses who have not earned any tax free income from such investments, by artificially deeming one half percentage of such investments as expenditure in relation to tax free income??, when there is no such income as such???..

Based on the abovementioned judicial pronouncements and Rule 8D in its present form, to me it appears that this rule cannot be applied retrospectively at all.. Let's wait for the courts to decide whether Rule 8D can be applied retrospectively...
                                                                                   ---XXX---

Would request you to share your views on this topic. Thanks