The decision of the President of the ITAT to stay hearing of appeals involving Daga Capital 119 TTJ 289 (Mum) (SB) has provided temporary reprieve to beleaguered assesses reeling under the twin losses of Daga Capital and Cheminvest. In Daga Capital, it was held that Rule 8D though inserted vide notification No. 45/2008 dated 24th March 2008 would apply to pending matters as well. Though the Special Bench was not concerned with the mechanics of Rule 8D, its ruling cast a gloom because Rule 8D, if literally applied, can result in the quantum of disallowance exceeding the quantum of exempt income! Of course, the correct interpretation, according to some experts, is that 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.
Daga Capital came close to being referred to a 5 Member Bench for reconsideration. In GE Capital, the Bench fairly acknowledged that at the time of hearing, its initial impression was to write a reference to the President for constituting a larger Bench though it stopped itself because an appeal had already been filed in the Bombay and Delhi High Courts against Daga Capital and as per the decision of the President in Star India a reference to a larger Bench cannot be made when the High Court is seized of the issue. It, however, was considerate enough to direct that the appeals be blocked for 6 months or till the disposal of appeal by the Bombay High Court in Daga Capital whichever was earlier.
Cheminvest added to the pall of gloom by holding that the disallowance under section 14A has to be made even if assessee has no tax-free income in the year.
There was some reprieve, however, in the form of Citizen Hotels (ITAT Mumbai) and Indexport Ltd (ITAT Mumbai) where it was held that section 14A & Daga Capital could not put the assessee in a worse position than what the AO had subjected him to.
Likewise, in Topstar Mercantile (Bombay High Court) it was held that the Tribunal could not remand the matter to the AO to apply Daga Capital if the AO had originally not made any disallowance on the ground of s. 14A.
On the same lines, in CIT vs. Hindustan Tin Works Ltd. (2009) 24 DTR 88 (Del.), it was held if during the assessment proceedings, and during the appellate proceedings before the CIT(A), the revenue not had invoked section 14A and there was no material before the Tribunal, the Tribunal was justified in not permitting the department to raise an additional ground on section 14A.
Meanwhile, both the Bombay and the Delhi High Courts are seized of appeals filed against Daga Capital and it will be interesting to see which verdict is the first to come out.
Of course, what the verdict is will be more interesting …. LOL!!
Section 14A is probably the only section to have the dubious distinction of being referred to the Special Bench multiple times.
The latest one expected to join the club is whether section 14A can apply to a partner’s share of profit from a firm. Is the said profit exempt from tax as provided by s. 10(2A) or is it really income which, in view of the pass-through nature of firm, has suffered tax in the hands of the firm and is not charged to tax in the hands of the partner only to avoid double taxation? Well, the issue was nicely settled in favour of the assessee by the judgements of the Bombay Bench in Sudhir Kapadia vs. ITO & Hitesh Gajaria vs. ACIT. Unfortunately, a contrary view was taken by the Bombay Bench in Dharmasingh Popat vs. ACIT without noticing the earlier two decisions. The result: The services of the Special Bench will probably be requisitioned again to resolve the controversy.
Meanwhile, a bit of good news trickled in from Chandigarh. In CIT vs. Hero Cycles, the Punjab & Haryana High Court ruled that the dreaded Rule 8D would apply only if there was in fact some expenditure relatable to the exempt income. Just how important this ruling is can be gauged from the fact that the Revenue vehemently argued there that whether one likes it or not, some expenditure, directly or indirectly, is always incurred which must be disallowed u/s 14A. Fortunately, the Court made light work of the submission and brought some cheer to the beleaguered assessees.