ESSILOR INDIA PVT LTD vs. THE DEPUTY

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 28TH DAY OF JANUARY 2022 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE SHIVASHANKAR AMARANNAVAR I.T.A. NO.1000 OF 2017 BETWEEN: ESSILOR INDIA PVT. LTD., NO.71/1, BRIGADE PLAZA 6TH FLOOR S.C. ROAD GANDHINAGAR BENGALURU-560 009 REPRESENTED HEREIN BY ITS DIRECTOR MR. J. SHIVKUMAR PAN:AAACE4623J. .... APPELLANT (BY MR. SURYANARAYANA T, SR. COUNSEL FOR MRS. TANMAYEE RAJKUMAR, ADVOCATE) AND: 1. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE- 3 (1) (2) BENGALURU RASHTROTHANA BHAVAN 6TH FLOOR NURPATHUNGA ROAD BENGALURU-560 001. 2. THE COMMISSIONER OF INCOME TAX-2 BMTC BUILDING KORAMANGALA 6TH BLOCK

2 BANGALORE-560 095 ... RESPONDENTS (BY MR. K.V. ARAVIND, ADVOCATE) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 07.07.2017 PASSED IN ITA NO.1654/BANG/2016, FOR THE ASSESSMENT YEAR 2008- 2009, PRAYING TO (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE TRIBUNAL DATED 07.07.2017 PASSED IN ITA NO.1654/BANG/2016 (ANNEXURE-F), TO THE EXTENT QUESTIONED HEREIN. (c) PASS SUCH OTHER OR SUITABLE ORDERS AS THIS HON'BLE COURT DEEMS FIT TO PASS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Year 2007-08. The appeal was admitted by a Bench of this Court on the following substantial questions of law:

(i) The Tribunal was right in upholding the disallowance under Section 14A of the Act read with Rule 8D of the Rules, although no satisfaction had been recorded by the

3 Assessing Officer to the effect that the disallowance proposed to the extent of Rs.1,61.035/- by the Appellant was incorrect?

(ii) Whether in the light of the decision of the Hon'ble Supreme Court in CIT VS. ESSAR TELEHOLDING S LTD', (2018) 90 TAXMANN.COM 2 (SC) holding that Rule 8D of the Income Tax Rules, 1962 is prospective and applicable from AY 2008-09, a disallowance under Section 14A could at all have been made in the appellant's case for the assessment year in question? 2. Facts leading to filing of this appeal briefly stated are that the assessee is engaged in the business of processing and trading of ophthalmic lenses. The assessee received dividend of Rs.26,26,877/- from its subsidiary GKBRX Lens Pvt. Ltd. in which assessee held 50% of the shares during the assessment year 2007-08. The assessee filed its return of income where the aforesaid dividend income was claimed as exempt under Section 10(34) of the Act. The Assessing officer passed an order of assessment dated 28.10.2010 and disallowed a sum of Rs.26,26,877/- under Section 14A of the

4 Act as being expenditure which was incurred towards earning the exempt income. The Commissioner of Income Tax (Appeals) by an order dated 27.07.2012, inter alia, accepted the contention of the assessee that Rule 8D of the Rules would not apply to the Assessment Year in question and restricted the disallowance to Rs.9,61,967/-, being 0.01% of the average investments made during the year. 3. The assessee as well as the revenue filed appeals before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 30.09.2013 remitted the matter to the Assessing Officer to examine the disallowance under Section 14A of the Act with a direction to examine the assesee's claim that no expenses were incurred to earn the exempt income. The Assessing officer by an order dated 09.02.2015 once again by applying Rule 8D of the Rules made a disallowance of Rs.26,26,877/-. The Commissioner of Income Tax (Appeals) by an order dated 05.07.2015 dismissed the appeal preferred by the assessee and the Tribunal by an order dated

5 07.07.2017 has upheld the same. In the aforesaid factual background, this appeal has been filed. 4. Learned Senior counsel for the assessee submitted that Rule 8D of the Rules is prospective in nature and is applicable from Assessment year 2008-09 onwards and therefore, a disallowance under Section 14A of the Act could not have been made in the case of the assessee. In support of aforesaid submission, reliance has been placed on decision of the supreme court in 'CIT VS. ESSAR TELEHOLDINGS LTD., (2018) 90 TAXMANN.COM 2(SC). 5. On the other hand, learned counsel for the revenue submitted that even though Rule 8D of the Rules does not apply to the assessment year in question yet the explanation with regard to the expenses made by the assessee in earning the exempt income has to be made under Section 14A(1) and (2) of the Act and therefore, the matter deserves to be remitted. 6. We have considered the submissions made on both sides and have perused the record. Sub-Section (2) and

6 (3) of Section 14A of the Act were inserted by Finance Act 2006 with effect from 01.04.2007. The amount of disallowance can be determined under the aforesaid provisions only in accordance with such method that may be prescribed. Rule 8D of the Rules prescribes the method which came into effect from 24.03.2008. The Supreme Court in CIT VS ESSAR TELEHOLDINGS LTD supra has held as follows: 48. Applying the principles of statutory interpretation for interpreting retrospectively of a fiscal statute and looking into the nature and purpose of sub-Section (2) and sub-Section (3) of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively. 7. In view of aforesaid enunciation of law by the Supreme Court, it is evident that Rule 8D(3) applies from assessment year 2008-09 and is not applicable to the assessment year in question viz., 2007-08. There was no method available for computation of disallowance for the

7 assessment year 2007-08 and therefore, no disallowance under Section 14A of the Act could be made. 8. For the aforementioned reasons, the additional substantial question of law is answered by stating that Rule 8D of the Rules is prospective in nature and is applicable to the assessment year 2008-09 and therefore, no disallowance under Section 14A of the Act could be made in case of the assessee for the Assessment Year 2007-08. In view of our answer to the aforesaid question of law, it is not necessary to answer other questions of law. In the result, the order passed by the Tribunal dated 07.07.2017 in ITA No.1657/bang/2016 is quashed. In the result, the appeal is allowed. Sd/- JUDGE Sd/- JUDGE ss