2022 (7) TMI 797 - HC - Income Tax

Disallowance u/s 14A - inter departmental dispute - cases between the Union of India and the companies fully owned by the Government of India - Tribunal held that the provisions of Rule 8D should not have been applied without appreciating that the provisions of section 14A introduced by the Finance Act, 2001 is applicable with retrospective effect from 01.04.1962 - whether Tribunal was correct in holding that the only company from which dividend is received shall be considered for the purpose of Rule 8D? - HELD THAT - AO has recorded that accounts had revealed that there were certain heads of expenditure which could have been incurred towards the management. Thus, the Assessing Officer has made his own assessment and not recorded the satisfaction based on the record. In that view of the matter, the solitary ground urged by Shri Sanmathi is untenable. The Tribunal has rightly followed the decision of this Court in 2020 (12) TMI 679 - KARNATAKA HIGH COURT Hence, this question of law raised by the Revenue is answered in favour of the Assessee. Resultantly, this appeal does not merit any consideration. Before parting with the case, we had requested the learned advocates on both sides and also Shri A.Shankar, learned Senior Advocate as amicus curie to assist this Court with regard to the cases pending between the Union of India and the companies fully owned by the Government of India. In the instant case, the Assessee is Hindustan Aeronautics Ltd. The appellant is the Government of India represented by the Ministry of Finance. As adverted to Section 48 of Reserve Bank of India Act, 1934 and submitted that RBI is exempted from income tax and Super tax. We see force in his contention and we are of the considered view that litigation between the Public Sector Undertakings, which are fully owned by the Government of India and regulated by the Ministries like, HAL, ISRO, etc., is not desirable. It would be in the interest of all the concerned to ensure that there is no litigation at all or as minimum litigation as most essential. We take this opportunity to convey our concern and to ensure that these directions reach the appropriate forum, we direct the learned advocate for the appellant to implead Ministry of Law and Justice and Ministry of Finance as respondents No.2 and 3. Impleadment shall be carried out forthwith. Shri Shanthibhushan, ASG is directed to take notice. We direct respondents No.2 and 3 to examine in detail and issue appropriate directions to the concerned Public Sector/Undertakings to avoid or to minimise the inter-departmental litigation. A copy of this order shall be sent to the Secretary, Ministry of Finance and also Ministry of Law and Justice for their consideration. So far as question of law is concerned, this appeal stands dismissed with the observations recorded hereinabove.

Summary

Issues:
1. Interpretation of Rule 8D of Income Tax Rules regarding the applicability of Section 14A introduced by the Finance Act, 2001.
2. Consideration of only the company from which dividend is received for the purpose of Rule 8D.
3. Assessment under Section 14A of the Income Tax Act and the application of CBDT Circular No.5/2014.

Analysis:
1. The appeal raised questions regarding the application of Rule 8D and the retrospective effect of Section 14A introduced by the Finance Act, 2001. The Tribunal held that Rule 8D should not have been applied mechanically, considering the specific circumstances of the case. The court analyzed the facts and the Assessing Officer's satisfaction, ultimately favoring the Assessee based on the decision in a previous case (ITA No.404/2016).

2. The issue of considering only the company from which dividend is received for Rule 8D purposes was raised. The Tribunal's decision was challenged, arguing that the Assessing Officer had not recorded satisfaction as claimed. However, the court found the argument untenable, supporting the Tribunal's decision based on the facts and the Assessing Officer's assessment.

3. The assessment under Section 14A of the Income Tax Act was a crucial aspect of the case. The Tribunal's order was questioned for being perceived as perverse in nature. The court examined the application of CBDT Circular No.5/2014, emphasizing the legislative intent to disallow expenditure related to earning exempt income. The court upheld the Tribunal's decision, ruling in favor of the Assessee based on the specific facts and legal interpretations presented.

4. Additionally, the court addressed the broader issue of cases pending between the Union of India and companies fully owned by the Government of India. The discussion highlighted relevant Supreme Court cases and the need to minimize inter-departmental litigation involving public sector undertakings. The court directed the impleadment of relevant ministries and emphasized the importance of avoiding unnecessary litigation, especially concerning entities like HAL and ISRO.

5. The judgment concluded by dismissing the appeal, appreciating the assistance provided by the Senior Advocate. The court emphasized the need to minimize litigation involving government-owned entities and directed the concerned ministries to issue appropriate directions to avoid unnecessary legal disputes.