2016 (1) TMI 1295 - AT - Income Tax

Disallowance of expenditure under section 14A read with rule 8D - Held that - We find that the issue is squarely covered in favour of the assessee in the own case of the assessee for the earlier assessment year. The strategic investments in group companies and sister concerns for having control over the management of the said companies are not intended for the purpose of earning of exempt income. Under such circumstances for computing the average value of investment for the purpose of disallowance under rule 8D(2)(iii), the investments made in unquoted shares of the subsidiaries sister concerns/group companies for strategic purposes are required to be excluded. We, therefore, direct the AO to verify as if the assessee has net positive interest income during the year, then no disallowance of interest is to be made under section 8D(2)(ii) and further direct the AO to exclude the strategic investments made in subsidiaries while computing disallowance of administrative expenses under rule 8D(2)(iii) of the IT rules.

Summary

Issues involved:
1. Disallowance of expenditure under section 14A read with rule 8D incurred in relation to earning tax-exempt income.

Analysis:
1. The judgment involves two appeals by related assessees against separate orders of the Commissioner of Income Tax (Appeals) regarding the disallowance of expenditure under section 14A. The Assessing Officer had disallowed interest expenditure and administrative expenses, which were confirmed by the CIT(A).

2. In the first appeal (ITA No.1067/M/2013), the assessee contested the disallowance of expenditure under section 14A. The assessee argued that netting interest income against interest expenditure resulted in a positive interest income, indicating no expenditure for earning exempt income. The assessee relied on tribunal decisions supporting this argument.

3. The tribunal analyzed the contentions and cited decisions, concluding that where an assessee has a net positive income, disallowance of interest expenditure under section 14A is not warranted. Regarding administrative expenses, the tribunal held that strategic investments made for control over management, not for earning exempt income, should be excluded from the computation of disallowance under rule 8D(2)(iii).

4. In the second appeal (ITA No.1073/M/2013), which mirrored the first appeal, the tribunal directed the Assessing Officer to compute the disallowance based on the findings in the first appeal. Consequently, both appeals were treated as allowed for statistical purposes.

5. The judgment provides a detailed analysis of the issues related to the disallowance of expenditure under section 14A and rule 8D concerning tax-exempt income. It emphasizes the importance of considering net positive income and the purpose of investments in determining the applicability of disallowances. The tribunal's decision clarifies the treatment of interest expenditure and administrative expenses in such scenarios, providing guidance for future assessments.