GE Capital Services vs. DCIT (ITAT Delhi)

Reference to larger Bench against Daga Capital rejected but appeals blocked

The assessee contended that the judgement of the ITAT Mumbai Special Bench in Daga Capital 26 SOT 603 where the view was taken that s. 14A (2) and (3) inserted by the Finance Act 2006 w.e.f 1-4-2007 and Rule 8-D inserted by the Income Tax (5th Amendment) rules 2008 w.e.f. 24-3-2008 were retrospective and applied w.e.f 1.4.1962 was wrong and the matter was required to be reconsidered by a 5 Member Bench on the following grounds:

(i) Rule 8D results in an onerous liability which takes it beyond the pale of being a mere procedural / clarificatory or declaratory provision. It results in a fresh liability imposed upon the assessee. It creates a departure from settled principles and goes far beyond the object and scope of section 14A (1) of the Act. Accordingly, Rule 8D cannot be interpreted as being retrospective in operation.

(2) The intention of s. 14A was to disallow expenditure that relates to earning of exempt income and not to disallow some astronomical expenditure determined as per artificial Rules. The disallowance mandated by Rule 8D many a times far exceeds the income and in effect there will be an enhancement of income if Rule 8-D is interpreted in the manner done by the Special Bench.

(3) On facts, the disallowance as per Rule 8-D on a dividend income of Rs. 1.81 crore works out to Rs. 6.12 crores. Other examples are provided to show that the disallowance of alleged expenditure will exceed the exempt income.

However, HELD rejecting the application that:

(i) Although at the time of hearing, the initial impression was to write a reference to the President for constituting a larger Bench the fact that an appeal has been filed in the Bombay and Delhi High Courts against Daga Capital means that (as per the decision of the President in Star India) a reference to a larger bench cannot be made.

(ii) However, the appeals should be blocked for 6 months or till the disposal of appeal by the Bombay High Court in Daga Capital whichever is earlier.