2016 (8) TMI 1148 - AT - Income Tax

Disallowance u/s 14A computation - Held that - No disallowance under section 14A of the Act can be made in the year in which no exempt income is earned. We therefore set aside the decision of the authorities below and direct the AO to delete the disallowance of expenditure under section 14A of the Act. Allowing the aforesaid decision of the Coordinate Bench of this Tribunal in the case of Fiduciary Euromax Global Markets Ltd. (2016 (8) TMI 728 - ITAT MUMBAI) we hold and direct that the strategic entire investments made by the assessee in group companies are to be excluded while computing the disallowance under section 14A r.w. Rule 8D. - Decided in favour of assessee

Summary

Issues Involved:
Disallowance under section 14A r.w. Rule 8D for A.Y. 2009-10.

Analysis:

Issue 1: Disallowance under section 14A r.w. Rule 8D

The appellant, a company engaged in IT-enabled services and BPO services, filed its return of income for A.Y. 2009-10. Following a search action, a notice under section 153A of the Income Tax Act, 1961 was issued, and the assessment was completed under section 143(3) r.w.s. 153A. The only disallowance made was of an amount under section 14A r.w. Rule 8D. The appellant challenged this disallowance before the CIT(A), who upheld it. The appellant contended that no disallowance was warranted as no exempt dividend income was earned in the relevant year. The appellant also argued that the investments made were strategic investments in subsidiary companies for control purposes, not for earning dividend income. The Revenue supported the orders of the authorities below.

Analysis: The Tribunal examined the contentions of both parties and the relevant legal provisions. It noted that the appellant had not earned any exempt income in the year under consideration, a fact not disputed by the CIT(A). Referring to the decision of the Hon'ble Delhi High Court in Cheminvest Ltd., the Tribunal held that no disallowance under section 14A can be made when no exempt income is earned. It emphasized that the provisions of section 14A apply when there is actual receipt of income not includible in the total income. Therefore, in the absence of exempt income, the disallowance under section 14A r.w. Rule 8D was not justified.

Additionally, the appellant argued that the investments made were strategic in nature for controlling group companies, not for earning tax-exempt income. The Tribunal, relying on a decision of a Coordinate Bench in a similar context, directed the exclusion of strategic investments made by the appellant in group companies while computing the disallowance under section 14A r.w. Rule 8D.

In conclusion, the Tribunal allowed the appellant's appeal for A.Y. 2009-10, setting aside the disallowance under section 14A of the Act.