2019 (9) TMI 1207 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - Only some questions of law arise which, according to Mr. Khaitan, learned senior advocate, have not been properly appreciated by the tribunal. Altogether throwing out the appeal might cause injustice to the appellant. In those circumstances, we had directed the appellant s advocate on record to serve notice on the respondent. By consent of the parties, we have heard out the appeal. On the facts and in the circumstances of the case, we feel that the above questions of law should be referred to the tribunal. On remand, it shall decide both the legal and factual issues arising out of Section 14A of the Income Tax Act, 1961 as contained in the said questions and pass a reasoned order after hearing the parties within six months from the date of communication of the order.

Summary

Issues Involved:
1. Interpretation of section 14A of the Income Tax Act, 1961 regarding the disallowance of expenses related to handling investments by employees performing multiple functions.
2. Justification of the tribunal's decision to reject the appellant's working and explanation for disallowance under section 14A and invoking rule 8D of the Income Tax Rules, 1962.

Analysis:

Issue 1: Interpretation of Section 14A of the Income Tax Act, 1961
The High Court considered whether, in a scenario where employees undertake various duties, including investment handling, the apportioned salary and expenses for disallowance under section 14A can be disregarded, and if rule 8D can be applied instead. The Court noted the appellant's contention that the tribunal failed to appreciate the legal aspects properly. Despite not identifying substantial questions of law, the Court acknowledged the potential for injustice to the appellant and thus directed a remand to the tribunal for a thorough examination of both legal and factual issues arising from section 14A. The tribunal was instructed to provide a reasoned decision after hearing both parties within six months, thereby setting aside the tribunal's previous order.

Issue 2: Justification of Tribunal's Decision
Regarding the second issue, the Court evaluated the tribunal's decision to reject the appellant's working and explanation for disallowance under section 14A, opting instead to apply sub-section (2) of section 14A and rule 8D for a substantial disallowance amount. The Court found the tribunal's findings to be arbitrary, unreasonable, and perverse. Consequently, the Court overturned the tribunal's order dated 27th November, 2018, to the extent that it invoked sub-section (2) of section 14A and rule 8D for disallowance. The appeal and stay application were disposed of, emphasizing the need for a comprehensive reconsideration of the issues involved under section 14A.

In conclusion, the High Court's judgment in this case centered on the interpretation and application of section 14A of the Income Tax Act, 1961, particularly in situations involving employees with diverse responsibilities, including investment handling. The Court emphasized the importance of a thorough examination of both legal and factual aspects by the tribunal to ensure a just and reasoned decision.