2016 (2) TMI 905 - AT - Income Tax

Disallowance u/s 14A - Held that - Addition made on account of section 14A where investments are made in sister concerns such as equity shares and share application money. However, if the investments are made from borrowed funds, section 14A of the Act would be applicable and learned Assessing Officer shall compute the disallowance under section 14A read with rule 8D in accordance with law.

Summary

Issues:
1. Assessee's appeal - Disallowance on interest on current investments in share application money under section 14A of the Act.
2. Revenue's appeal - Disallowance deletion made by CIT(A) under section 14A of the Act.

Assessee's Appeal Analysis:
The assessee raised three grounds in its appeal challenging the direction of the CIT(A) to make proportionate disallowances on interest on current investments in share application money under section 14A of the Act. The issue revolved around whether section 14A was applicable to the investments made by the assessee in its sister company. The AR contended that since the investments were in sister companies, section 14A should not apply. The Tribunal referred to various precedents and held that when investments are made in sister companies for strategic purposes and not for earning exempt income, section 14A does not apply. The Tribunal directed the Assessing Officer to delete the addition made under section 14A for investments in sister concerns, except when investments are made from borrowed funds.

Revenue's Appeal Analysis:
The Revenue raised grounds challenging the deletion of disallowance made under section 14A by the CIT(A). The issue was whether the disallowance under section 14A should be upheld. The Tribunal considered the arguments of both parties and examined the nature of investments made by the assessee in its subsidiary company. Relying on previous decisions, the Tribunal concluded that if investments are made in sister concerns for business expediency and not for earning exempt income, section 14A does not apply. Therefore, the Tribunal directed the Assessing Officer to delete the disallowance made under section 14A for the relevant assessment years, except when investments are funded by borrowed funds.

In conclusion, the Tribunal partially allowed both the assessee's and Revenue's appeals. The Tribunal's decision was based on the principle that section 14A of the Act does not apply when investments are made in sister concerns for strategic business purposes and not for earning exempt income. The Tribunal directed the Assessing Officer to delete the disallowance under section 14A for investments in sister concerns, except when funded by borrowed funds. The judgment provided a detailed analysis of the legal precedents and the application of section 14A in the context of investments in sister companies.