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2017 (3) TMI 1832 - AT - Income TaxDisallowance u/s 14A read with Rule 8D(2)(iii) - indirect expenditure for earning exempt income - HELD THAT - Calculation of disallowance as per Rule 8D(2)(iii) is erroneous, as the AO without assigning any reason did not reduce the investment in mutual funds and group concern which does not quire incurrence of major expenditure.We restore this ground back to the file of A.O. for fresh consideration. As we have restored the appeals of the Assessee, we also restore the appeals of the revenue to the file of the Assessing Officer who shall consider the submissions of the Assessee that the dividend income from the investments in HDFC Mutual Fund (Growth Plan) is taxable when the dividend is received and also the capital gains is attracted for the gain received on sale of these investments. AO should also consider as to whether investment in foreign subsidiary company is also taxable or not. In case, the return from these investments are taxable, the question of applying disallowance under section 14A does not arise. The Assessing Officer should examine all these aspects and decide the issue in accordance with law after providing adequate opportunity to the Assessee.
Issues: Disallowance under section 14A read with Rule 8D(2)(iii) for indirect expenditure for earning exempt income.
Analysis: 1. The appeals were filed by the Assessee and the Revenue against the orders of the Ld. CIT (Appeals) for the assessment years 2010-11 and 2011-12 concerning the disallowance made under section 14A read with Rule 8D(2)(iii) for indirect expenditure related to earning exempt income. The Assessee argued that investments in HDFC Mutual Fund were made as per business policy and did not involve significant expenditure, thus should not be considered for disallowance. The Assessee also highlighted that dividends were reinvested, not physically received, and administrative expenses were minimal. Reference was made to a previous Tribunal decision favoring the Assessee in a similar context. 2. The Ld. CIT (Appeals) sustained disallowance of specific expenditures related to investments in HDFC Mutual Fund (dividend plan) for the assessment years 2010-11 and 2011-12. However, the disallowance on investments in Debt Oriented Mutual Funds (Growth Plan) was deleted. The Revenue appealed against the deletion of disallowance on investments in HDFC Mutual Fund (Growth Plan) and a foreign subsidiary company. 3. The Tribunal referred to a previous decision for the assessment year 2009-10 where it was held that investments made as per business policy, like in HDFC Mutual Fund, should not be considered for disallowance under Rule 8D(2)(iii) as they did not involve significant expenditure. The Tribunal directed the issue to be reconsidered by the Assessing Officer based on this observation. 4. Consequently, the Tribunal restored the issue to the Assessing Officer for fresh consideration in line with the previous decision. The Assessing Officer was instructed to provide the Assessee with a fair opportunity to present their case. 5. The Tribunal also directed the Assessing Officer to review whether dividend income from investments in HDFC Mutual Fund (Growth Plan) is taxable upon receipt, and if capital gains apply to gains from the sale of these investments. Additionally, the taxability of investments in a foreign subsidiary company was to be assessed. If returns from these investments are taxable, the application of disallowance under section 14A would not be necessary. The Assessing Officer was tasked with examining these aspects and making a decision in compliance with the law while ensuring the Assessee's right to be heard. This detailed analysis of the judgment provides a comprehensive overview of the issues involved and the Tribunal's directives for reconsideration and assessment by the Assessing Officer.
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