2018 (1) TMI 1231 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - rectification of mistake - power of rectification under Section 254(2) - Held that - As in the case of Pr. CIT vs. Nirma Credit & Capital (P.) Ltd. 2017 (9) TMI 485 - GUJARAT HIGH COURT has decided the construction of Section 14A, subsequent to the decision of the Tribunal, but it has interpreted that expression amount of expenditure by way of interest would be construed as net interest expenditure for making disallowance under Section 14A read with Rule 8D of the Income-tax Rules. A perusal of the record would indicate that this aspect was not considered by the Tribunal. The assessee has net interest income and therefore, there would not have been any disallowance under Section 14A. To our mind, it is an apparent mistake committed by the Tribunal which deserves to be rectified. Therefore, we recall the order of the Tribunal

Summary

Issues Involved:
Determining interest expenditure disallowance under Section 14A read with Rule 8D of the Income-tax Rules.

Analysis:
1. The judgment addressed three Miscellaneous Applications filed by the assessee regarding errors in the Tribunal's order related to interest expenditure disallowance under Section 14A. The dispute arose from the disallowance of interest by the Assessing Officer, which was later reduced by the CIT(A) resulting in an appeal by the Revenue. The Tribunal concurred with the CIT(A)'s decision to some extent but disagreed on the treatment of shares held as stock in trade for calculating the disallowance amount.

2. The Tribunal's decision was based on the CIT(A)'s calculation of interest disallowance at 6.57% on investments, excluding shares held as stock in trade. However, the Tribunal found this exclusion contrary to the precedent set by a special bench of the Tribunal. Consequently, the Tribunal directed the Assessing Officer to compute the disallowance at 6.57% of the total investment amount, reversing the CIT(A)'s decision partially.

3. The assessee raised contentions in the Miscellaneous Application, arguing that no interest-bearing funds were used for investments, resulting in net interest income. Citing a judgment by the jurisdictional High Court, the assessee contended that only net interest expenditure should be considered for disallowance under Section 14A. The Tribunal acknowledged this argument, noting that the High Court's interpretation postdated its decision. It recognized the High Court's clarification that "amount of expenditure by way of interest" should be construed as net interest expenditure for disallowance under Section 14A.

4. Consequently, the Tribunal found an apparent mistake in its earlier decision and recalled the order for re-adjudication. It modified the order to consider the net interest income of the assessee, leading to no disallowance under Section 14A. Additionally, the Tribunal allowed a Miscellaneous Application related to the penalty under Section 271(1)(c) for fresh adjudication after resolving quantum issues.

5. In conclusion, all three Miscellaneous Applications were allowed, emphasizing the importance of considering net interest expenditure for disallowance under Section 14A. The Tribunal rectified its earlier decision based on the subsequent interpretation provided by the jurisdictional High Court, ensuring equitable application of the law.

(Order pronounced on 23rd January, 2018 at Ahmedabad)