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Total Number of Subscribers: 428 |
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Posted to the desk of |
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Date: 11 June 2008 |
Compiled by Mr. M. Sathya Kumar |
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New Rule 8D – A lesson in tight rope walking? "The author Mr. Anant N. Pai
argues that Rule 8D can be invoked only when it is not possible to work out
the disallowance correctly say due to the complexity involved in the accounts
or lack of some vital information" 1.Over period of time, Rules have traditionally played hand
maids to Statutory Provisions. This is discipline that was religiously
followed both by the law makers and the judiciary. Rules were always meant to
be subservient to the Statute. A conflict between the Statute and the Rules
was therefore always resolved in favour of the former. The role of Rules, as
subordinate legislation, was well understood. Even where Rules were created
not by delegated legislation, but by the law makers themselves, they did not
enjoy the same force as a principal enactment. This principle was well
observed by the Gujarat High Court in its tax decision in the case of CIT vs. Satellite
Engineering Ltd. [1978] as reported in 113 ITR 208, 223 (Guj). 2. Even in the mode of interpretation, Courts have noted that
Rules cannot travel beyond the main Statute and have to be read subject to
the provisions of the Statute itself. All India Lakshmi Commercial
Bank Officers Union vs. Union of India [1984] 150 ITR 1, 7. (Del). Rules were thus
read consistent with the provisions of the Act and if a rule goes beyond what
the Act contemplates, the Rule has no option but to yield to the Act. The
guiding principle is that it is the section which must control and govern the
rule and the rule must be interpreted in the light of the section and not
vice versa. CIT vs. New Citizen Bank of India [1965] 58 ITR 468,
484 (Bom). Lastly, Statutory rules must be interpreted in the light of the
section for the purpose of which they are made. 3. An interesting issue has just come to the fore on account of
the new Income Tax Rule 8D. This rule has been prescribed by the Central
Board of Direct Taxes and notified vide notification No. 45/2008 dated 24th March 2008
for the purpose of section 14A of the Income-tax Act, (2008) 299 ITR (St.)
88. 4. As we are aware, section 14A provides for disallowance of
expenditure in relation to income not includible in total income. Sub-section
[2] is pertinent. This sub-section enjoins on the Assessing Officer to determine
the amount of expenditure incurred in relation to such income which does not
form part of the total income under this Act in accordance with such method
as may be prescribed, if the Assessing Officer, having regard to the accounts
of the assessee, is not satisfied with the correctness of the claim of the
assessee in respect of such expenditure in relation to income which does not
form part of the total income under this Act. Sub-section [3] then provides
that the provisions of sub-section (2) shall also apply in relation to a case
where an assessee claims that no expenditure has been incurred by him in
relation to income which does not form part of the total income under this
Act: 5. The new Rule 8D reads as under :—
6. At first glance, the new rule may appear fearsome. But, this
may not be so. We have seen above that there is enough authority to subdue a
rule by interpreting the same is context of the statutory provision to which
it is subordinate. 7. The issue addressed in this article is whether the Assessing
Officer is duty bound to determine the disallowance of expenditure by
resorting to the method prescribed u/r 8D merely because he disagrees with
the working of the disallowance on its correctness, when any other scientific
working is still possible based on the information in book of account. In
short, even if the accounts are reliably maintained and a determination of
disallowance of the expenditure is possible on some decent scientific method,
whether a resort can be made by the Assessing Officer to the rule of thumb
method prescribed in Rule 6D? 8. In the first place, the assessee, on his own, is not obliged
to compute the disallowance as per the method prescribed in rule 8D. The
assessee is entitled to work out the disallowance by any scientific method
based on the information in his accounts. The Rule 8D is meant for the
Assessing Officer’s determination of the expenditure
and not for the assessee. 9. The Assessing Officer has to be first dissatisfied with the
correctness of disallowable expenditure calculated by the Assessing Officer.
It is a mandatory condition in section 14A that this dissatisfaction is
reached “having regard to the accounts of the assessee”. Even Rule 8D agrees that the Assessing Officer should be
dissatisfied “having regard to the accounts”. In
short, he
cannot disregard the accounts in making his inquiry whether the disallowance
worked by the assessee is correct. If, having regard to the accounts, he
feels that the disallowance calculated by the assessee can be corrected by
reworking it scientifically, he need not invoke the provisions of rule 8D.
This is more particularly so, when the books of account provide the means to
work out the disallowance correctly. If, there are no accounts or the
accounts are unreliable and requires to be rejected, rule 8D cannot be
invoked as this rule itself depends on accounts [the balance sheet figures]
for its calculation. 10. According to me, Rule 8D can be invoked only when it is not
possible to work out the disallowance correctly having regard to the
accounts, say due to the complexity involved in the accounts or lack of some
vital information. This interpretation, I feel, will assign due weightage and
justice to the expression “having regards to the
accounts”. Rule 8D is meant as a measure of last resort only; i.e., when it
is not possible to work out the disallowance correctly having regard to the
accounts. Even if the working of the disallowance made by the assessee is
wrong, the Assessing Officer must take due regard to the accounts and find
out whether the disallowance can be worked on basis of accounting principles.
This, he is expected to do so honestly and only when this possibility is
exhausted, he must resort to the determination by Rule 8D. 11. The above interpretation, dear readers, I feel, will align
Rule 8D with the provisions in section 14A. Interpretation of Rules in
alignment with the statute is sometimes veritably a lesson in tightrope
walking. The rope is the statute, the walker is the Rules and the balancing
stick is the principle of interpretation that Rules must confirm to the
provisions of the principal enactment. Article by CA Anant N. Pai , Reprodued from the AIFTP Journal - April 2008 issue.
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