2015 (5) TMI 420 - AT - Income Tax

Disallowance u/s 14A - whether on facts, where there is no exempt income, can the provisions of section 14A be invoked at all? - Held that - the instant case, there is no claim of exempt income. The assessee explained the reason as well, as to how the dividend income received is taxable, because, the receipt of dividend was from a Sahakari Bank, which does not fall within the definition of Scheduled Bank and hence does not come within the scope of section 115O. Thus we are of the opinion that the revenue authorities erred in computing the disallowance. - Decided in favour of assessee. Whether there would be an effect in the working of tax in accordance with the provisions of section 115JB - Held that - Provision of section 115JB would get attached, if the income determined under normal provisions is less then MAT, in such a circumstances MAT will supercede the normal provisions. Here in the case before us we do not find any reference of MAT provision. In such a circumstance, the second limb become otiose. In any case, tax payable under normal provisions was much more then MAT provisions. - Decided in favour of assessee. Depreciation claimed on inflated cost of windmills - CIT(A) allowed claim - Held that - CIT(A), who allowed the claim of depreciation, placing reliance on the decision of his predecessors in assessment years 2002-03, 2003-04 and 2008-09 in the case of Karma Energy Ltd. (now amalgamated with the assessee). The issue was taken by the department before the ITAT and the ITAT, after considering detailed replies and submissions from either side, rejected the appeal as filed by the department, allowing the claim of depreciation - Decided against revenue. Exclusion of tax free investments from which no income was earned from the working of average tax free investment for the purpose of working under Rule 8D - Held that - The assessee had interest free own funds of ₹ 8248.44 lacs and investments of ₹ 5162.95 lacs. This would clearly show that there would be no diversion of interest bearing funds. In such a case, the decision of Reliance Utilities and Power Ltd reported in 2009 (1) TMI 4 - HIGH COURT BOMBAY would squarely cover the conduct of the assessee.Since the assessee did not intend to earn dividend and the investments made were from interest free funds, in our opinion, the CIT(A) was correct to hold that no further disallowance was called for. We, therefore, sustain the order of the CIT(A), deleting the disallowance - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Depreciation claimed on the inflated cost of windmills.
3. Exclusion of tax-free investments from the working of average tax-free investment for the purpose of Rule 8D.
4. Applicability of Section 14A where no tax-free dividend income is earned.

Detailed Analysis:

ITA No. 7551/Mum/2012: Assessee's Appeal

Issue: Disallowance under Section 14A

- Facts: The assessee received taxable dividend income from a non-scheduled bank and did not claim it as exempt. The AO, however, computed a disallowance of Rs. 52,06,481/- under Rule 8D, which was reduced to Rs. 19,76,095/- by the CIT(A).
- Judgment: The ITAT held that Section 14A, which pertains to expenses related to exempt income, cannot be invoked when there is no exempt income. The tribunal referenced multiple case laws supporting this view, including decisions by the Hon'ble Allahabad High Court and the Hon'ble Gujarat High Court.
- Conclusion: The appeal of the assessee was allowed, and the disallowance was deleted.

ITA No. 7622/Mum/2012: Department's Appeal

Issue 1: Depreciation on Inflated Cost of Windmills

- Facts: The AO disallowed depreciation on windmills purchased at allegedly inflated prices. The CIT(A) allowed the claim based on precedents.
- Judgment: The ITAT upheld the CIT(A)'s decision, referencing previous ITAT orders in favor of the assessee.
- Conclusion: The ground was rejected.

Issue 2: Partial Relief under Section 14A

- Judgment: Following the decision in ITA No. 7551/Mum/2012, the ITAT held that no disallowance is warranted where there is no exempt income.
- Conclusion: The ground was rejected.

Issue 3 & 4: General Grounds

- Conclusion: These grounds were dismissed as general.

Overall Conclusion: The department's appeal was dismissed.

ITA No. 86/Mum/2013: Department's Appeal

Issue: Exclusion of Tax-Free Investments in Rule 8D Calculation

- Facts: The AO computed disallowance under Section 14A including all investments, while the assessee excluded non-dividend yielding investments. The CIT(A) ruled in favor of the assessee.
- Judgment: The ITAT upheld the CIT(A)'s decision, noting that the assessee used interest-free funds for investments and intended to gain control rather than earn dividends. The tribunal cited relevant case laws, including Reliance Utilities and Power Ltd.
- Conclusion: The appeal was dismissed.

ITA No. 87/Mum/2013: Department's Appeal

Issue: Applicability of Section 14A Without Tax-Free Income

- Facts: The AO made a disallowance under Section 14A despite the assessee not earning any exempt income. The CIT(A) deleted the disallowance.
- Judgment: The ITAT distinguished this case from the Special Bench decision in Cheminvest Ltd., noting that the absence of exempt income precludes Section 14A's application. The tribunal referenced multiple High Court decisions supporting this view.
- Conclusion: The appeal was dismissed.

Summary:
- Assessee's Appeal (ITA No. 7551/Mum/2012): Allowed.
- Department's Appeals (ITA Nos. 7622/Mum/2012, 86/Mum/2013, 87/Mum/2013): Dismissed.

Order pronounced in the open court on 22nd April, 2015.