2020 (2) TMI 1233 - HC - Income Tax

Rectification u/s 254 - Revenue appeal dismissed on low tax effect - HELD THAT - Appeal of Revenue was dismissed by the Tribunal on account of low tax effect in view of the CBDT Circular No. 03 of 2018 dated 11.7.2018. Thereafter the application for rectification was filed which was dismissed vide impugned order holding that this was outside the scope of rectification. Today learned counsel has argued that the case was wrongly dismissed on account of low tax effect whereas it was covered by exceptions in Circular. When we go through the circular the only item which could be possibly related is para No. 10 of the circular which is quoted herein below 10. Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect entailed is less than the monetary limits specified in para 3 above or there is no tax effect (a) Where the Constitutional validity of the provisions of an Act or Rule is under challenge or (b) Where Board s order Notification Instruction or Circular has been held to be illegal or ultra vires or (c) Where Revenue Audit objection in the case has been accepted by the Department or (d) Where the addition relates to undisclosed foreign assets/band account. The only point to which this argument can be relatable is Clause 10 (b). We asked the learned counsel where any Notification Order Instruction or Circular has been held to be illegal or ultra vires. Her argument is that though no Order Notification Instructions or Circular has been held to be legal or ultra vires but effect of the said Circular has not been correctly understood. In our considered view that is beyond the exception clause count down by the circular. No substantial question of law proposed arises.

Issues:
1. Appeal by Revenue under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal.
2. Questions of law raised regarding the dismissal of the Miscellaneous application by the ITAT.
3. Interpretation of CBDT Circular No. 5/2014 and its applicability to the case.
4. Consideration of section 14A and Rule 8D in relation to expenses relatable to earning exempt income.
5. Disallowance of interest to the extent of exempt income under section 14A and Rule 8D.
6. Principle of apportionment of expenses regardless of exempt income.
7. Disallowances under section 14A not exceeding exempt income.
8. Legality of CBDT Circular No. 5 of 2014 in consonance with legislative intent.

Analysis:
1. The appeal by the Revenue under Section 260-A of the Income Tax Act was against the ITAT's order relating to the assessment year 2014-2015. The questions of law raised included the dismissal of the Miscellaneous application by the ITAT without considering the merits of the case. The ITAT was questioned for not reinstating and deciding on the legal issues raised by the Revenue.

2. The interpretation of CBDT Circular No. 5/2014 was a crucial aspect of the case. The questions revolved around whether the ITAT was justified in dismissing the Miscellaneous application without considering the legislative intent expressed in the circular. The circular emphasized the consideration of expenses related to earning exempt income for disallowances, irrespective of whether such income was earned during the financial year.

3. Section 14A and Rule 8D were significant in determining the disallowances related to expenses attributable to earning exempt income. The legal issue raised was whether the ITAT erred in dismissing the Miscellaneous application without appreciating that the applicability of these provisions does not depend on the actual earning of income, as held in relevant Supreme Court judgments.

4. Another issue was the disallowance of interest to the extent of exempt income stipulated under section 14A and Rule 8D. The ITAT's decision to dismiss the Miscellaneous application without deciding the merits raised concerns regarding the restriction on disallowing interest in relation to exempt income.

5. The principle of apportionment of expenses, regardless of exempt income, was highlighted in the case. The ITAT was questioned for not considering this principle as laid down by the Supreme Court in relevant decisions, which upheld the concept of apportionment in such cases.

6. The dispute also involved whether the disallowances under section 14A should not exceed the exempt income earned. The ITAT's dismissal of the Miscellaneous application without deciding on the merits raised concerns regarding the application of this principle and the legal interpretation of the relevant provisions.

7. Lastly, the legality of CBDT Circular No. 5 of 2014 was challenged in relation to its alignment with the legislative intent behind Section 14A and the charging sections of the Income Tax Act. The ITAT's decision to dismiss the Miscellaneous application without considering the legality of the circular raised significant legal questions regarding its applicability and interpretation.

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