2012 (10) TMI 397 - AT - Income Tax

High Court Modifies ITAT Judgment on Exempt Income Expenditure Calculation

The ITAT's judgment was modified to align with the overruling of the Special Bench judgment by the Jurisdictional High Court. The High Court clarified ... Rectification of Order u/s 254 - Whether non-consideration of a decision of Jurisdictional Court or of the Supreme Court can be said to be a 'mistake apparent from the record” - Held that:- it is settled principle of law that the decision of the jurisdictional High Court or the Hon’ble Supreme Court rendered prior to or even subsequent to the order, will constitute mistake apparent from the record within the meaning of Section 254 (2) and it should be corrected by the Tribunal. Decision of Apex Court in ACIT Vs. Saurashtra Katch Stock Exchange of India (2008 (9) TMI 11 - SUPREME COURT) followed. Issues:Applicability of Section 14A for disallowance, Overruling of Special Bench judgment by Jurisdictional High Court, Mistake apparent from the record in ITAT's order.Analysis:1. Applicability of Section 14A for disallowance:The ITAT decided the issue against the assessee based on the Special Bench judgment in the case of M/s Daga Capital Management Private Limited. The Special Bench held that Section 14A has an overriding effect and applies to all expenditure in relation to exempt income, including indirect expenses. The ITAT referred the matter back to the Assessing Officer to make the disallowance under Section 14A in accordance with the Special Bench's ratio. However, the assessee argued that the Special Bench judgment was overruled by the Jurisdictional High Court in another case. The High Court held that even prior to the applicability of Rule 8D, the Assessing Officer must determine the expenditure related to income not forming part of the total income under the Act. The Tribunal, after considering the subsequent High Court decision, modified its order directing the Assessing Officer to work out the disallowance under Section 14A based on a reasonable basis and relevant material.2. Overruling of Special Bench judgment by Jurisdictional High Court:The assessee contended that the Special Bench judgment was overruled by the Jurisdictional High Court, making the ITAT's decision based on the Special Bench's ratio incorrect. The High Court's decision clarified that the Assessing Officer must determine the expenditure related to exempt income even before the applicability of Rule 8D. The ITAT, after considering the High Court's decision, modified its order to align with the High Court's ruling, emphasizing the retrospective effect of judicial decisions and the principle that subsequent decisions clarify the correct legal position.3. Mistake apparent from the record in ITAT's order:The issue of whether the subsequent decision of the Jurisdictional High Court constituted a mistake apparent from the record in the ITAT's order was analyzed. Citing the Supreme Court's observation, the ITAT acknowledged that the decision of the High Court, rendered prior or subsequent to the order, could constitute a mistake apparent from the record. The Tribunal, in line with legal principles, modified its directions and order to ensure compliance with the High Court's judgment, emphasizing the importance of rectification to uphold justice and correct errors in the application of legal principles.In conclusion, the ITAT's judgment was modified to reflect the overruling of the Special Bench judgment by the Jurisdictional High Court, emphasizing the need for Assessing Officers to determine disallowances under Section 14A based on a reasonable basis and relevant material, even before the applicability of Rule 8D. The decision underscores the retrospective effect of judicial decisions and the Tribunal's duty to rectify errors to uphold justice.