2016 (3) TMI 1329 - AT - Income Tax

Disallowance u/s 14A - expenditure attributable for earning exempt income - Held that - We hereby direct the learned Assessing Officer to delete the addition made by the AO which was further sustained by the learned Commissioner of Income Tax (Appeals) on account of section 14A read with Rule 8D subject to verification that all the investments are made by the assessee in its subsidiary/sister concerns and to the extent of investments the assessee has own funds in the form of reserves & surplus. See THE ASSISTANT COMMISSIONER OF INCOME TAX VERSUS M/S. DATA SOFTWARE RESEACH COMPANY (INTERNATIONAL) PVT. LTD. AND VICE-VERSA 2016 (2) TMI 905 - ITAT CHENNAI - decided in favour of assessee for statistical purposes.

Summary

Issues:
Disallowance of expenditure under section 14A read with rule 8D for earning exempt income.

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of &8377; 3,79,87,050/- as expenditure attributable to earning exempt income under section 14A read with rule 8D. The assessee, engaged in telecommunication and networking business, had made investments in subsidiary companies, resulting in exempt dividend income. The Assessing Officer invoked section 14A and disallowed the expenditure. The Commissioner upheld this decision, stating that expenses were incurred in relation to investments in shares for earning exempt income. However, the assessee argued that no expenditure was incurred for making investments in sister companies as they were made from interest-free funds. The Tribunal referred to previous decisions and remitted the matter back to the Assessing Officer for re-examination. It highlighted that if investments were made from borrowed funds, section 14A would apply, but not if made from own funds.

The Tribunal emphasized that in cases where investments are made in sister concerns from interest-free funds, section 14A with rule 8D would not be applicable. It directed the Assessing Officer to delete the addition of &8377; 3,79,87,050/- if all investments were in subsidiary/sister concerns and the assessee had sufficient own funds. The decision was made in line with previous rulings and the principle that no disallowance should be made if no expenditure was incurred for earning exempt income. The appeal was allowed for statistical purposes, and the Assessing Officer was instructed to verify the nature of investments and the availability of own funds before making any disallowance under section 14A.