2012 (12) TMI 288 - AT - Income Tax

Deduction u/s 14A - held that - The object of section14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. In the present case, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mere fact that shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. Proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment - where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim - AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act - restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of our aforesaid observations , after allowing sufficient opportunity to the assessee - In the result, appeal is partly allowed but for statistical purposes. Decision of Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - DELHI HIGH COURT followed.

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Business activity and eligibility for deduction of business expenses.
3. Applicability of Section 14A when no exempt income is earned.
4. Computation of disallowance under Rule 8D(2)(iii) of the Income Tax Rules.

Detailed Analysis of the Judgment:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The primary issue was the disallowance of Rs. 8,52,43,836/- by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961. The AO observed that the assessee company made significant investments to acquire controlling interest in Ambuja Cement India Ltd. and incurred substantial expenses. The AO concluded that since the investment was made to earn dividend income (which is exempt), the related expenses were not allowable as deductions. The AO relied on various judicial precedents to support the disallowance, which was later upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Business Activity and Eligibility for Deduction of Business Expenses:
The assessee argued that it was engaged in business activities, including making investments to acquire controlling interests, and the related expenses were revenue in nature. However, the AO and CIT(A) found that the assessee did not carry out any business activity other than the single investment in shares, which did not constitute a business activity with a profit motive. The CIT(A) upheld the AO's finding that the primary purpose of the investment was to earn dividend income, and hence, the expenses were not deductible under Section 28 of the Act.

3. Applicability of Section 14A When No Exempt Income is Earned:
The assessee contended that Section 14A should not apply since no exempt income (dividend) was earned during the year. However, the CIT(A) rejected this argument, stating that Section 14A disallows expenditure incurred in relation to income that does not form part of the total income, regardless of whether such income is earned during the year. The CIT(A) relied on the Special Bench decision in Cheminvest Ltd. v. ITO, which held that disallowance under Section 14A is applicable even if no exempt income is earned.

4. Computation of Disallowance under Rule 8D(2)(iii) of the Income Tax Rules:
The assessee argued that if any disallowance were to be made, it should be computed as per the formula prescribed in Rule 8D(2)(iii). However, the AO disallowed the entire expenses without analyzing the nature of each expense item. The CIT(A) supported this approach, stating that since the entire expenditure was attributable to earning exempt income, the AO's action was justified. The Tribunal, however, noted that the AO did not examine the accounts of the assessee to determine the correctness of the claim and directed the AO to re-examine the issue, following the principles laid down in judicial precedents, including the decision of the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. v. Dy. CIT, which held that Rule 8D applies prospectively from AY 2008-09.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, setting aside the order of the CIT(A) and directing the AO to re-examine the issue of disallowance under Section 14A afresh, in light of the observations and judicial precedents discussed. The AO was instructed to pass a speaking order, giving reasons for satisfaction or otherwise, and the assessee was directed to furnish all relevant details of expenditure incurred in managing and supervising the investments.

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