2017 (8) TMI 1616 - AT - Income Tax

Disallowance u/s 14A read with rule 8D(iii) - investment in the subsidiary domestic Company - CIT-A deleted the addition - HELD THAT - Assessee has come up with specific argument that it has not incurred any interest cost for earning exempt income but this plea of the assessee has also been brushed aside by the AO without recording any reason of dis-satisfaction. When it is admitted fact that the assessee has not incurred any interest expenses during the year under assessment and it was having ample cost free funds to invest in its subsidiaries for commercial expediency the question of disallowance under Rule 8D does not arise - also not in dispute that the income derived by the assessee company from the investment made in its subsidiary is otherwise taxable. When assessee has not utilized any borrowed fund for investment nor made any interest payment nor earned any dividend there is no question of making disallowance by the AO u/s 14A read with Rule 8D of the Rules. CIT (A) by considering all these facts has rightly deleted the addition.- Decided against Revenue.

Summary

Issues:
1. Disallowance under section 14A read with Rule 8D for investment in subsidiary domestic company.
2. Disallowance under section 14A when no exempt income is earned, ignoring circular no. 5/2014 of the Board.
3. Reliance on jurisdictional High Court decision for disallowance under section 14A.

Analysis:

1. The Appellant, the Assistant Commissioner of Income-tax, challenged the order passed by the Commissioner of Income-tax (Appeals) seeking to set aside the disallowance made under section 14A read with Rule 8D for investment in a subsidiary domestic company. The Assessing Officer computed the disallowance based on the balance sheet information, which the Appellant contested. The Appellate Tribunal noted that the Assessing Officer mechanically applied Rule 8D without recording dissatisfaction, which is impermissible. The Tribunal referred to legal precedents to emphasize the need for the Assessing Officer to reject the claim of the assessee with cogent reasons before determining the disallowance under section 14A.

2. The issue of disallowance under section 14A when no exempt income is earned was also raised. The Appellant argued that no disallowance can be made when no exempt income is earned, citing a circular from the Board. However, the Tribunal found that the Assessing Officer did not provide valid reasons for the disallowance and failed to consider the commercial expediency of the investments made by the assessee. The Tribunal highlighted that the mere existence of investments does not automatically warrant disallowance under section 14A.

3. The Appellant contested the reliance on a jurisdictional High Court decision regarding the applicability of disallowance under section 14A. The Tribunal reiterated that the Assessing Officer must have valid reasons and dissatisfaction with the assessee's claims before invoking Rule 8D for disallowance. The Tribunal emphasized the importance of a reasoned decision by the Assessing Officer based on objective criteria rather than a mechanical application of the rules.

In conclusion, the Tribunal dismissed the appeal filed by the Revenue, upholding the order of the Commissioner of Income-tax (Appeals) that deleted the disallowance. The Tribunal found no legal basis for the disallowance under section 14A read with Rule 8D, as the Assessing Officer failed to provide valid reasons or record dissatisfaction with the assessee's claims. The decision underscored the necessity for a thorough assessment and reasoned determination before making any disallowances under section 14A of the Income-tax Act.