2019 (11) TMI 1432 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee has earned dividend income and claimed the same as exempted income under Section 10(35) - CIT(Appeals) allowed the claim of the assessee on the ground that it was invested in the subsidiary companies for strategic investments - HELD THAT - As rightly submitted by the Ld. D.R. and the Ld.counsel for the assessee, even if the investment was made in subsidiary company and for strategic investment, the provisions of Section 14A of the Act would be applicable. CIT(Appeals) is not correct in saying that the strategic investment made in the subsidiary companies is to be excluded. Contention of the Ld. D.R. that in view of the language employed in Rule 8D(2)(iii) of Income-tax Rules, 1962 does not and shall not , even the investment which has potential to earn profit in the subsequent year also has to be considered for disallowance. This Tribunal is of the considered opinion that in view of the decision of Special Bench of Delhi Bench in the case of Vireet Investment (P.) Ltd . 2017 (6) TMI 1124 - ITAT DELHI what is to be considered is only the investments which result in exempted income during the year under consideration. AO has to find out the investment which yielded exempted income during the year under consideration. Accordingly, the orders of both the authorities below are set aside and the entire issue of disallowance made under Section 14A of the Act is remitted back to the file of the AO. AO shall re-examine the matter and find out on the basis of material filed by the assessee, the investments which yielded exempted income during the year under consideration and thereafter decide the issue afresh in accordance with law, after giving a reasonable opportunity to the assessee.- Appeal filed by the Revenue is allowed for statistical purposes.

Summary

Issues:
Disallowance under Section 14A of the Income-tax Act, 1961 for investments in subsidiary companies.

Analysis:
The appeal concerns the order of the Commissioner of Income Tax (Appeals) -6, Chennai, for the assessment year 2014-15. The Revenue challenged the direction to exclude investments in subsidiary companies from disallowance under Section 14A. The Departmental Representative argued that investments in subsidiaries are subject to disallowance under Section 14A, citing the judgment in Maxopp Investment Ltd. v. CIT. He emphasized that Rule 8D(2)(iii) mandates disallowance of expenditure in earning exempted income, regardless of actual income. The Counsel for the assessee acknowledged the applicability of Section 14A but contended that Rule 8D(2)(iii) limits disallowance to investments not forming part of total income. The Tribunal examined the contentions and relevant precedents.

The Tribunal noted that the assessee earned dividend income of ?3,08,46,380 and claimed it as exempt under Section 10(35). The Assessing Officer disallowed ?2,21,21,765 under Rule 8D(2)(iii). The CIT(Appeals) allowed the claim, citing strategic investments in subsidiaries. The Tribunal held that Section 14A applies even to strategic investments in subsidiaries. Regarding the interpretation of Rule 8D(2)(iii), the Tribunal disagreed with the Revenue's argument. It cited the decision in Vireet Investment (P.) Ltd. by the Special Bench of Delhi Tribunal, emphasizing that only investments resulting in exempted income are to be considered for disallowance. The Tribunal found no merit in the Revenue's contention based on the language of Rule 8D(2)(iii).

Given the above analysis, the Tribunal concluded that the decision in Vireet Investment (P.) Ltd. supersedes the Hyderabad Bench's decision in Bellwether Microfinance Fund Pvt. Ltd. The matter was remitted back to the Assessing Officer to identify investments yielding exempted income during the relevant year. The Assessing Officer was directed to re-examine the issue and decide accordingly, providing the assessee with a reasonable opportunity. The appeal by the Revenue was allowed for statistical purposes.

This comprehensive analysis of the issues involved in the judgment provides a detailed understanding of the Tribunal's decision regarding disallowance under Section 14A for investments in subsidiary companies and the interpretation of Rule 8D(2)(iii) in the context of exempted income.