The Assessing Officer has applied Rule 8D to an assessment year before 2008-09. Can he?
No. Rule 8D is prospective and cannot be applied to any assessment year prior to AY 2008-09. For earlier years the officer must work out a reasonable disallowance under s.14A(1) on the material before him, not by the prescribed formula.
Decided by the Supreme Court (A.K. Sikri J and Ashok Bhushan J (judgment delivered by Ashok Bhushan J)) on 2018-01-31, reported as Civil Appeal No. 2165 of 2012, decided with a batch of connected civil appeals and special leave petitions (Supreme Court of India). It bears on section 14A, section 14A(2), section 14A(3), section Rule 8D, section 10(23G) of the Income Tax Act 1961, in Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters.
This is the Supreme Court's answer to a question it had expressly left open in Godrej & Boyce, and it closes off Rule 8D for every year up to AY 2007-08 — which still matters in reassessment, s.263 and appeal-effect proceedings on old years. Note what it does NOT decide: it says nothing about whether a disallowance can be made where no exempt income was earned, and nothing about the Explanation inserted by the Finance Act 2022. Note also para 45, where the Court reproduces Rule 8D(2) as substituted with effect from 2 June 2016 — a two-limb rule (direct expenditure plus 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), capped at the total expenditure claimed. The old clause (ii) interest formula is gone. Any order or submission still running the A x B / C interest formula for a year from AY 2017-18 onwards is applying a rule that no longer exists.
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The assessee filed its return for AY 2003-04 on 1 December 2003 declaring a loss of Rs 69,92,67,527. On notice under s.143(2), the Assessing Officer by order dated 27 March 2006 held that the company had received both taxable and non-taxable dividend income, and disallowed proportionate interest of about Rs 26 crores under s.14A read with s.10(23G) referable to the investment on which the s.10(23G) exemption was available. The Commissioner (Appeals) partly allowed the appeal on 5 March 2009. The Tribunal allowed the assessee's appeal following the Bombay High Court in Godrej and Boyce Manufacturing Company Limited v. DCIT (2010) 328 ITR 81 (Bom), holding that Rule 8D was only prospective and not applicable to the year, and restored the issue to the Assessing Officer for de novo adjudication without invoking Rule 8D. The Bombay High Court dismissed the Revenue's appeal on 12 September 2011 following its own decision in Godrej and Boyce. The batch before the Supreme Court was confined to one question: whether sub-sections (2) and (3) of s.14A inserted with effect from 1 April 2007 apply to all pending assessments, and whether Rule 8D is retrospectively applicable.
All the appeals filed by the Revenue were dismissed. Rule 8D is prospective in operation and could not have been applied to any assessment year prior to AY 2008-09, so the dismissal of the Revenue's appeal by the Bombay High Court was fully sustainable (paras 48, 50 and 51).
The Court applied the principles of statutory interpretation governing the retrospectivity of a fiscal statute to the nature and purpose of sub-sections (2) and (3) of s.14A and to the purpose and intent of Rule 8D, reading them with the explanatory notes to the Finance Bill 2006 and the departmental understanding reflected in the Circular dated 28 December 2006 (para 48). It pointed to the further substitution of Rule 8D by the Income-tax (Fourteenth Amendment) Rules 2016 with effect from 2 June 2016, which it set out in full, and reasoned that reading the 2008 rule as retrospective would create a conflict in the applicability of the Fifth and Fourteenth Amendment Rules — an indication that the rule operates prospectively and was prospectively changed by the adoption of another methodology (paras 45 and 46). It recorded the assessee's submission, resting on State of Jharkhand & Ors. v. Shiv Karampal Sahu (2009) 11 SCC 453, that subordinate legislation is ordinarily not retrospective unless there is clear indication to that effect, as one that needed to be noticed (para 47); it found no indication in Rule 8D that the rule was intended to apply retrospectively. The Court recorded that in Godrej and Boyce the Supreme Court had repelled the challenge to the vires of s.14A but had expressly left the question of retrospectivity to be decided in the Revenue's appeals, which is why it decided it here (para 49).
Applying the principles of statutory interpretation for interpreting retrospectivity 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.
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Handle my notice → Ask a CA on WhatsAppNo. Rule 8D is prospective and cannot be applied to any assessment year prior to AY 2008-09. For earlier years the officer must work out a reasonable disallowance under s.14A(1) on the material before him, not by the prescribed formula. This was decided by the Supreme Court (A.K. Sikri J and Ashok Bhushan J (judgment delivered by Ashok Bhushan J)) and bears on section 14A, section 14A(2), section 14A(3), section Rule 8D, section 10(23G) of the Income Tax Act 1961. It is reported as Civil Appeal No. 2165 of 2012, decided with a batch of connected civil appeals and special leave petitions (Supreme Court of India). This is the Supreme Court's answer to a question it had expressly left open in Godrej & Boyce, and it closes off Rule 8D for every year up to AY 2007-08 — which still matters in reassessment, s.263 and appeal-effect proceedings on old years. Note what it does NOT decide: it says nothing about whether a disallowance can be made where no exempt income was earned, and nothing about the Explanation inserted by the Finance Act 2022. Note also para 45, where the Court reproduces Rule 8D(2) as substituted with effect from 2 June 2016 — a two-limb rule (direct expenditure plus 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), capped at the total expenditure claimed. The old clause (ii) interest formula is gone. Any order or submission still running the A x B / C interest formula for a year from AY 2017-18 onwards is applying a rule that no longer exists. If it applies to you, the first step is this: Identify the assessment year on the face of the order. If it is AY 2007-08 or earlier, Rule 8D cannot be applied at all and the disallowance must be recomputed on a reasonable basis under s.14A(1).
The assessee filed its return for AY 2003-04 on 1 December 2003 declaring a loss of Rs 69,92,67,527. On notice under s.143(2), the Assessing Officer by order dated 27 March 2006 held that the company had received both taxable and non-taxable dividend income, and disallowed proportionate interest of about Rs 26 crores under s.14A read with s.10(23G) referable to the investment on which the s.10(23G) exemption was available. The Commissioner (Appeals) partly allowed the appeal on 5 March 2009. The Tribunal allowed the assessee's appeal following the Bombay High Court in Godrej and Boyce Manufacturing Company Limited v. DCIT (2010) 328 ITR 81 (Bom), holding that Rule 8D was only prospective and not applicable to the year, and restored the issue to the Assessing Officer for de novo adjudication without invoking Rule 8D. The Bombay High Court dismissed the Revenue's appeal on 12 September 2011 following its own decision in Godrej and Boyce. The batch before the Supreme Court was confined to one question: whether sub-sections (2) and (3) of s.14A inserted with effect from 1 April 2007 apply to all pending assessments, and whether Rule 8D is retrospectively applicable. The matter was decided on 2018-01-31 by the Supreme Court (A.K. Sikri J and Ashok Bhushan J (judgment delivered by Ashok Bhushan J)). On those facts the Supreme Court held as follows. All the appeals filed by the Revenue were dismissed. Rule 8D is prospective in operation and could not have been applied to any assessment year prior to AY 2008-09, so the dismissal of the Revenue's appeal by the Bombay High Court was fully sustainable (paras 48, 50 and 51).
The Court applied the principles of statutory interpretation governing the retrospectivity of a fiscal statute to the nature and purpose of sub-sections (2) and (3) of s.14A and to the purpose and intent of Rule 8D, reading them with the explanatory notes to the Finance Bill 2006 and the departmental understanding reflected in the Circular dated 28 December 2006 (para 48). It pointed to the further substitution of Rule 8D by the Income-tax (Fourteenth Amendment) Rules 2016 with effect from 2 June 2016, which it set out in full, and reasoned that reading the 2008 rule as retrospective would create a conflict in the applicability of the Fifth and Fourteenth Amendment Rules — an indication that the rule operates prospectively and was prospectively changed by the adoption of another methodology (paras 45 and 46). It recorded the assessee's submission, resting on State of Jharkhand & Ors. v. Shiv Karampal Sahu (2009) 11 SCC 453, that subordinate legislation is ordinarily not retrospective unless there is clear indication to that effect, as one that needed to be noticed (para 47); it found no indication in Rule 8D that the rule was intended to apply retrospectively. The Court recorded that in Godrej and Boyce the Supreme Court had repelled the challenge to the vires of s.14A but had expressly left the question of retrospectivity to be decided in the Revenue's appeals, which is why it decided it here (para 49). In the words reproduced by the source cited on this page: "Applying the principles of statutory interpretation for interpreting retrospectivity 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." The decision followed or applied Godrej and Boyce Manufacturing Company Limited v. DCIT (2010) 328 ITR 81 (Bom) — approved on prospectivity; Godrej and Boyce Manufacturing Company Limited v. DCIT (2017) 7 SCC 421 — distinguished as having left retrospectivity open; State of Jharkhand & Ors. v. Shiv Karampal Sahu (2009) 11 SCC 453 — relied on by the assessee, the submission recorded at para 47; the Court's own adoption of the proposition could not be reproduced verbatim.
It was decided by the Supreme Court on 2018-01-31 and is reported as Civil Appeal No. 2165 of 2012, decided with a batch of connected civil appeals and special leave petitions (Supreme Court of India). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 14A, section 14A(2), section 14A(3), section Rule 8D, section 10(23G), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All the appeals filed by the Revenue were dismissed. Rule 8D is prospective in operation and could not have been applied to any assessment year prior to AY 2008-09, so the dismissal of the Revenue's appeal by the Bombay High Court was fully sustainable (paras 48, 50 and 51). It arises in Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters, on section 14A, section 14A(2), section 14A(3), section Rule 8D, section 10(23G) of the Income Tax Act 1961, and was decided by A.K. Sikri J and Ashok Bhushan J (judgment delivered by Ashok Bhushan J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the year is AY 2017-18 or later, check which version of Rule 8D(2) the officer used: the substituted rule has only two limbs and no interest formula, and the aggregate cannot exceed the total expenditure claimed. Do not stretch this decision beyond prospectivity — for the 'no exempt income' point and the Finance Act 2022 Explanation you need the separate line of authority. Where an old year is reopened or revised, take the Rule 8D point at the computation stage as well as on jurisdiction; it survives even if the reopening does.
Still good law. This is the Supreme Court's own holding on the point and nothing later doubting it was located; a systematic later-treatment search was not completed in this pass, so treat that as unchecked rather than confirmed. Two limits must be carried with it. First, the rule whose prospectivity was decided is the Rule 8D notified on 24 March 2008; Rule 8D(2) was itself substituted by the Income-tax (Fourteenth Amendment) Rules 2016 with effect from 2 June 2016, and para 45 of this judgment reproduces the substituted text. Second, this decision says nothing about the Explanation inserted in s.14A by the Finance Act 2022. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read from indiankanoon ?type=print twice. Paragraph 48 was re-confirmed word for word through /docfragment/ and came back identically on both passes. The lead appeal is Civil Appeal No. 2165 of 2012; it was heard with a very long batch of connected civil appeals and SLPs, which the header lists in full. The signature block prints A.K. Sikri J first and Ashok Bhushan J second, while the judgment is authored by Ashok Bhushan J. No ITR citation is given in the text read, so none is asserted here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All the appeals filed by the Revenue were dismissed. Rule 8D is prospective in operation and could not have been applied to any assessment year prior to AY 2008-09, so the dismissal of the Revenue's appeal by the Bombay High Court was fully sustainable (paras 48, 50 and 51).
TaxSphere, “CIT v Essar Teleholdings Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-essar-teleholdings-rule-8d-prospective-ay-2008-09/ (validity last checked 2026-09-08)
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My whole exempt dividend income has been wiped out by the s.14A disallowance. Is that permissible?
The Assessing Officer has computed a s.14A disallowance under Rule 8D. Which version of Rule 8D applies to my year, and is the disallowance capped?
Your own funds exceed the tax-free investments. Can interest still be disallowed proportionately?
I said I incurred no expenditure to earn my dividend income, and the officer simply applied rule 8D and disallowed a large sum. Can he go straight to the formula?
