2016 (7) TMI 1252 - AT - Income Tax

Disallowance u/s 14A - Held that - Disallowance made out of interest expenditure and confirmed by the ld. CIT(A) is not sustainable as sufficient evidence thus was brought on record by the assessee company to establish that investment in shares was made by it out of its own funds and the borrowed funds were entirely utlised for the purpose of its business. As a matter of fact, even the authorities below have not disputed this position. So far as common administrative expenses u/s 14A of the Act are concerned, the Tribunal directed the Assessing Officer to verify this aspect from the assessment record of earlier assessment years and restricted the disallowance, out of common administrative expenses to 2% of the total exempt income and the ground was partly allowed. Thus, so far as, disallowance out of common administrative expenses u/s 14A of the Act is concerned, the ld. Assessing Officer is directed to follow the directions of the Tribunal as contained in the order for Assessment year 2005- 06 So far as, the strategic investment as no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified, accordingly the same is deleted. Transactions with respect to own business demerger and consequent receipt of shares out of non-cash transactions direct the Assessing Officer to examine the claim of the assessee and decide afresh Disallowance u/s 14A while computing minimum alternate tax u/s 115JB - The argument on behalf of the assessee is that the amount should be restricted to 13.66 lakhs or 2% of the dividend income for calculating income for the purposes of section 115 JB - Held that - Assessing Officer is directed to examine the claim of the assessee. Thus, this ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Application of Rule 8D of the Income Tax Rules, 1962.
3. Strategic investments.
4. Transactions related to business demerger and receipt of shares.
5. Disallowance under Section 14A while computing Minimum Alternate Tax (MAT) under Section 115JB.
6. Deleting disallowance while computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The core issue revolves around the disallowance under Section 14A, amounting to ?13,66,300/- and further disallowance of ?24,41,598/- under Rule 8D(2)(iii). The assessee argued that investments were made from own funds, not borrowed funds. The Tribunal considered previous judgments, including the Tribunal's order for AY 2005-06, which favored the assessee, confirming that the investments were made from own funds. The Tribunal reiterated that disallowance under Section 14A should be based on the principle of consistency unless there is a change in facts or law.

2. Application of Rule 8D of the Income Tax Rules, 1962:
The Tribunal held that Rule 8D is applicable prospectively from AY 2008-09. For AY 2005-06, the Tribunal directed the AO to verify the disallowance of common administrative expenses and restrict it to 2% of the total exempt income. This approach was consistent with the Tribunal's earlier decisions for AYs 2006-07 and 2007-08, where it was established that investments were made from own funds.

3. Strategic Investments:
The Tribunal addressed the issue of strategic investments, referencing the case of M/s J. M. Financial Ltd. vs Addl. CIT. It was established that investments in subsidiary companies were long-term and strategic, with no direct or indirect expenditure incurred for maintaining these investments. The Tribunal directed the AO to follow the ratio laid down in the previous orders, confirming that no disallowance under Section 14A is warranted for such strategic investments.

4. Transactions Related to Business Demerger and Receipt of Shares:
The Tribunal accepted the assessee's claim regarding the receipt of shares through non-cash transactions due to business demerger. It was noted that similar claims had been accepted in previous years, and the factual matrix was not disputed by the Revenue. The Tribunal directed the AO to examine the claim and decide afresh, considering the provided observations.

5. Disallowance under Section 14A while Computing Minimum Alternate Tax (MAT) under Section 115JB:
The Tribunal directed the AO to restrict the disallowance to ?13.66 lakhs or 2% of the dividend income for calculating income for the purposes of Section 115JB. The AO was instructed to examine the claim of the assessee accordingly.

6. Deleting Disallowance while Computing Book Profit under Section 115JB:
The Revenue's appeal challenging the deletion of disallowance while computing book profit under Section 115JB was dismissed. The Tribunal upheld the CIT(A)'s decision, which followed the Tribunal's earlier orders confirming that the assessee's own funds were more than sufficient for the investments, and no interest disallowance was warranted.

Conclusion:
The appeal of the assessee (ITA No.8489/Mum/2011) was allowed for statistical purposes, and the appeals of the Revenue (ITA No.152/Mum/2012 and 1278/Mum/2013) were dismissed. The Tribunal's decisions were based on the principles of consistency, verification of facts, and adherence to established legal precedents.