2017 (12) TMI 1641 - HC - Income Tax

Disallowance u/s 14A - assessee has been made investment of interest bearing funds in the partnership firm profit of which was exempt - Held that - As decided in M/S. SWASTIK COAL CORPOATION PVT. LTD., INDORE 2016 (3) TMI 1333 - ITAT INDORE it has to be necessarily held that once the appellant has earned substantial taxable income from investment in partnership firm and the Exempt Income earned being merely 3% of the substantial taxable income earned by the appellant the disallowance has to be made in the ratio of Exempt/Taxable income and accordingly, disallowance made under rule 8D has to be proportionately reduced. The disallowance made is hereby directed to be reduced accordingly and appellant shall get consequential relief. We uphold the action of the CIT(A) in restricting the addition to the ratio of exempt income to taxable income. - Decided against revenue.

Summary

Issues:
1. Interpretation of Section 14A of the Income Tax Act, 1961.
2. Application of the ratio between exempt income and taxable income in determining disallowance.
3. Precedential value of a previous judgment by the Division Bench of the High Court.

Analysis:
1. The primary issue in this case revolved around the interpretation of Section 14A of the Income Tax Act, 1961. The Income Tax Appellate Tribunal (ITAT) had made a disallowance under this section, which was subsequently challenged. The Tribunal's decision was based on the appellant's investment of interest-bearing funds in a partnership firm, the profit of which was exempt. The Tribunal's decision to restrict the disallowance from ?31,98,441 to ?1,00,663 was upheld as it was deemed appropriate under Section 14A of the Act.

2. Another crucial aspect of the case was the application of a specific ratio between exempt income and taxable income in determining the disallowance under Section 14A. The Tribunal had applied a ratio of 1:30:85 for exempt income and taxable income, even though Section 14A r.w.r. 8D does not explicitly mention such a ratio. Despite this, the Tribunal dismissed the revenue appeal, indicating that the ratio applied was reasonable in the given circumstances.

3. The final issue pertained to the precedential value of a previous judgment by the Division Bench of the High Court in the case of Commissioner of Income Tax Vs. Swastik Coal Corporation Pvt. Ltd. The counsel for the appellant cited this judgment to support their argument, highlighting that the Division Bench decision was still valid and no appeal had been filed against it by the department. The High Court, considering this precedent, concluded that the issue in the present appeal had already been settled by the Division Bench, and hence, no substantial question of law arose. Consequently, the appeal was dismissed on the grounds of lacking merit.