THE COMMISSIONER INCOME TAX vs. CARBORANDUM UNIVERSAL LTD

Tax Case Appeal No.456 of 2021 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 16.09.2021 CORAM : THE HON'BLE MR. JUSTICE T.S. SIVAGNANAM AND THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP Tax Case Appeal No.456 of 2021 The Commissioner of Income Tax, Chennai

... Appellant Vs.

M/s.Carborandum Universal Ltd, C/o M/s.Subbaraya Aiyar Padmanabhan & Ramamani Advocates, New No.75A (Old No.105A) Dr.Radhakrishnan Salai, Mylapore, Chennai 600 004. ... Respondent

Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, “D” Bench, Chennai dated 19.05.2016 in I.T.A.No.1739/Mds./2014. For Appellant : Mr.T.Ravikumar

Senior Standing Counsel For Respondent : Mr.R.Vijayaraghavan for M/s.Subbaraya Aiyar Padmanabhan

Page 1/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 J U D G M E N T (Judgment was delivered by T.S. SIVAGNANAM, J.) This Tax Case Appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961, (“the Act” for brevity) is directed against the order dated 19.05.2016, passed by the Income Tax Appellate Tribunal, Madras “D” Bench, (“the Tribunal” for brevity), in I.T.A.No.1739/Mds/2014 for the Assessment Year 2008-09. 2.The Revenue has raised the following substantial questions of law for consideration : “1.Whether on the facts and circumstances of the case, the Tribunal was right in directing the AO to estimate the expenditure for earning the exempted income at 2% of the exempted income earned without any basis substituting the provisions under Section 14A? 2.Whether on the facts and in the circumstances of the case the Tribunal was right in holding that Rule 8D was not applicable to Asst year 2008-09 when the Bombay High Court had categorically held in the case of Godrej and Boyce Ltd Page 2/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 that provisions of Rule 8D are mandatory and applicable form the Asst. year 2008-09 onwards? 3. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the additional depreciation is to be allowed in an assessment year other than the asst. year in which New Plant and Machinery was already acquired and installed? 4.Is not the finding of the tribunal bad by allowing 50% of the additional depreciation in the subsequent asst. year when Section 32 (iia) allows for and restricts the allowance to the year in which the plant and machinery was acquired and installed? 5.Whether the reasoning and finding of the Tribunal is correct in directing the AO to grant balance part of additional depreciation in the subsequent asst. year when such allowance was granted by Finance Act, 2016 with effect from 01.04.2016 whereas the impugned asst year is 2008-09 and therefore not allowable?” Page 3/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 3.We have heard Mr.T.Ravikumar, learned Senior Standing Counsel, appearing for the appellant/Revenue and Mr.R.Vijayaraghavan, learned counsel for M/s.Subbaraya Aiyar Padmanabhan, learned counsel for the respondent/assessee. 4.So far as the substantial questions of law Nos.1 and 2 are concerned, the Tribunal came to the conclusion that the assessment under consideration is of the year 2008-09 and Rule 8D of the Income Tax Rules, 1962, (“the Income Tax Rules” for brevity) would not be applicable to the said assessment, as it was introduced by Income Tax (Fifth Amendment) Rules, 2008, with effect from 24.03.2008 and accordingly, the order passed by the Assessing Officer, as confirmed by the Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai, were set aside and the Assessing Officer was directed to remit the expenditure for earning the exempted income at 2% of the exempted income earned by the assessee. Page 4/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 5.In this regard, it is relevant to note the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax, Mumbai v. Essar Teleholdings Ltd. [(2018) 19 taxmann.com 2 (SC) : (2018) 401 ITR 445 (SC)]. The question which was decided by the Hon'ble Supreme Court was whether, Rule 8D of the Income Tax Rules is prospective in operation and whether it can be applied for any Assessment Year prior to Assessment Year 2008-09. This question was decided in the following terms : “36.The memorandum of explanation explaining the provisions of Finance Act, 2006 has clearly mentioned that Section 14 sub-section (2) and sub- section (3) shall be effective with effect from the assessment year 2006-07 alone which is another indicator that provision was intended to operate prospectively. ... 39.This Court in the above case held that Rule 1- BB shall be applicable even prior to the enforcement of the rule holding that the said rule merely provides a choice amongst well known and well-settled modes of valuation. It was held that even in the absence of Rule 1- BB, it would not have been objectionable to adopt the Page 5/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 mode of valuation embodied in Rule 1-BB, namely, the mode of capitalisation of income on a number of years purchased value. The said judgment is, clearly, distinguishable in context of issue which has arisen before us. In the present case, methodology as provided under Rule 8D was neither a well-known nor well- settled mode of computation. The new mode of computation was brought in place by Rule 8D. No Assessing Officer, even in his imagination could have applied the methodology, which was brought in place by Rule 8B. Thus, retrospective operation of Rule 8B cannot be accepted on the strength of law laid down by this Court in the above case. ... 43.There cannot be any dispute to the preposition that machinery provision of taxing statute has to give effect to its manifest purposes. But the applicability of the machinery provision whether it is prospective or retrospective depends on the content and nature of the Statutory Scheme. In the above case, the Court was not considering the question of prospectivity or retrospectivity of the machinery provision, hence the above case also does not help the appellant in the present case. Page 6/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 ... 45.As noted above, that Rule 8D has again been amended by Income Tax (Fourteenth Amendment) Rules, 2016 w.e.f. 02.06.2016, by which Rule 8D sub-rule (2) has been substituted by a new provision which is to the following effect: [(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.] 46.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 the Rule 8D retrospective, there will be a conflict in applicability of 5th & 14th Amendment Rules which clearly indicates that the Rule has a prospective operation, which has been prospectively changed by adopting another methodology. Page 7/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 ... 49.It is relevant to note that impugned judgment in this appeal relies on earlier judgment of Bombay High Court in Godrej and Boyce Manufacturing Co. Ltd. (supra) where the Division Bench of the Bombay High court after elaborately considering the principles to determine the prospectivity or retrospectivity of the amendment has concluded that Rule 8D is prospective in nature. Against the aforesaid judgment of the Bombay High court dated 12.08.2010 an appeal was filed in this court which has been decided by vide its judgment reported in Godrej and Boyce Mfg Co. Ltd. (supra). This Court, while deciding the above appeal repelled the challenge raised by the assessee regarding vires of Section 14A. In para 36 of the judgment, this Court noticed that with regard to retrospectivity of provisions Revenue had filed appeal, hence the said question was not gone into the aforesaid appeal. In the above case, this Court specifically left the question of retrospectivity to be decided in other appeals filed by the Revenue. We thus have proceeded to decide the question of retrospectivity of Rule 8D in these appeals. Page 8/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 50.In view of our opinion as expressed above, dismissal of the appeal by the Bombay High Court is fully sustainable. As held above, the Rule 8D is prospective in operation and could not have been applied to any assessment year prior to Assessment Year 2008-09.” 6.In the light of the above, the findings rendered by the Tribunal require to be interfered with. We take note of the fact that the decision of the Tribunal was rendered much earlier to the decision of the Hon'ble Supreme Court in the case of Essar Teleholdings Ltd. (supra), which was rendered on 31.01.2018. Therefore, we are inclined to remit the matter to the Tribunal for fresh consideration. 7.The learned counsel for the respondent/assessee submitted that, though the legal issue is as set above, the Assessing Officer, while completing the assessment vide order dated 20.12.2011, has made an addition of Rs.41,59,141/- as a disallowance under Section 14A of the Act and if this is the amount relating to the appeal, then the appeal filed by the Revenue cannot be pursued, as it is a Low Tax Effect case. Page 9/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 8.In our considered view, this issue requires to be discussed and conceded after the Revenue places appropriate materials to show that the case would fall within the ambit of the Circular issued by CBDT or whether the case has to be pursued by the Revenue in the event of any Audit objection or it is one of the exceptions mentioned in the Circular issued by the CBDT. Therefore, we are inclined to remand the matter to the Tribunal to decide the issue, which was raised in substantial questions of law Nos.1 and 2. 9.With regard to substantial questions of law Nos.3 to 5, it is not disputed by the Revenue that the questions are clearly covered by the decision of the Division Bench of this Court in the case of Commissioner of Income Tax, Chennai v. Aztec Auto (P) Ltd. [(2020) 119 taxmann.com 215 (Madras) : (2021) 277 Taxmann 273 (Madras)]. The operative portion of the judgment reads as follows :

“9.As rightly pointed out by Mr. T. Ravikumar, learned senior standing counsel for the appellant, the Tribunal erred in holding that there was no Judgment in Page 10/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 any other High Court, which is in favour of the Department. Without noting the fact that there were several decisions, one of which, the decision of the Division Bench of this Court in M.M.Forgings Ltd. v. Addl. CIT [2011] 11 taxmann.com 367/200 Taxman 36 (Mag.)/[2012] 349 ITR 673 (Mad.). It appears that the said decision was not brought to the notice of the Tribunal, which choose to follow the decision of High Court of Karnataka. Though the decision of the jurisdictional High Court in the case of M.M. Forgings Ltd. (supra), was available which was in favour of the revenue and against the assessee. 10.Be that as it may, the decision of the Tribunal in the case of Brakes India Ltd. v. Dy. CIT [T.C. A.No.551 of 2013, dated 14-3-2017], was appealed against before the Division Bench of this Court in and the Division Bench noted the decision in Rittal India Limited as well as M.M. Forgings and ultimately, allowed the appeal filed by the assessee. In doing so, the Division Bench of this Court distinguished the decision in the case of M.M. Forgings Ltd. (supra) by observing that the said case was not concerned with the issue with regard to right to carry forward the balance additional Page 11/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 depreciation and followed the decision in the case of CIT v. Shri T.P. Textiles (P.) Ltd. [2017] 79 taxmann.com 411/246 Taxman 324/394 ITR 483 (Mad.),which was decided in favour of the assessee and in which decision, the decision in the case of Rittal India (P.) Ltd. (supra), was also referred to. 11.The learned senior counsel for the revenue also pointed out that so far as the claim of balance 50% of the amount as deduction was provided for inserting the proviso under Section 32(1) and such insertion was with effect from 1-4-2016 by Finance Act, 2015. 12.In our considered view, the effect of the insertion of the proviso in the year 2016, may not have a bearing on the present issue, as during the relevant assessment year 2009-10, the law which has been settled by the Division Bench of this Court is the case of Brakes India Ltd. (supra), against the said decision, the revenue preferred an appeal before the Hon'ble Supreme Court in S.L.P. (C) No. 033755/2017 which was dismissed by an order dated 24-9-2018. Thus, the decision of the Division Bench in the case of Brakes India Ltd. (supra) having been approved by the Hon'ble Supreme Court, Page 12/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 we are bound by the said decision and accordingly, following the same. For the above reasons, the appeal filed by the Revenue is dismissed and the substantial question of law is answered against the Revenue. No costs.” 10.Thus, by applying the above decision, the substantial questions of law Nos.3, 4 and 5 are answered against the Revenue. 11.In the result, this Tax Case Appeal is partly allowed and the finding rendered by the Tribunal with regard to the effect of Section 14A read with Rule 8D, is set aside and the matter is remanded to the Tribunal for fresh consideration, and the substantial questions of law Nos.3 to 5 are decided against the Revenue. No costs. (T.S.S., J.) (S.S.K., J.) 16.09.2021

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Page 13/14 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.456 of 2021 T.S. SIVAGNANAM, J. and SATHI KUMAR SUKUMARA KURUP, J. mkn Internet : Yes

Index : Yes / No To 1.The Income Tax Appellate Tribunal, “D” Bench, Chennai. 2.The Commissioner of Income Tax, Chennai. Tax Case Appeal No.456 of 2021

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