In Brief
The Supreme Court held that Rule 8D of the Income Tax Rules, 1962, which prescribes a methodology for determining expenditure in relation to exempt income under Section 14A(2)-(3), applies prospectively from Assessment Year 2008-09 onwards only. Despite Section 14A having retrospective effect from 1962, the Court found that Rule 8D introduced a wholly new methodology that was not a well-known or well-settled practice. The explanatory memorandum and departmental circular both indicated prospective application from AY 2007-08. Applying established principles that machinery provisions creating new liabilities are presumed prospective, the Court distinguished prior authorities and dismissed the Revenue's appeals, finding no clear intent that Rule 8D should apply retrospectively to earlier assessment years.
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