2017 (9) TMI 1973 - AT - Income Tax

Addition u/s 14A - Mandation of recording of satisfaction - assessee company did not specifically pointed out any expenditure which is attributable to exempt income - CIT-A deleted the addition - HELD THAT - As carefully perused the computation of total income and we found that there is no exempt income earned by the assessee during the year. Further more, the expression given by the assessee before the Ld. assessing officer that investment made by the assessee were only ₹ 1 5652 9018/ whereas the shareholder s funds available with the assessee are ₹ 2 6275 1170. Therefore, the amount of investment made by the assessee for earning tax-free income are much more than the shareholders fund available with it. AO has not recorded any satisfaction with respect to the explanation of the assessee that no expenditure has been incurred by it and which is demonstrated by showing that the amount of shareholders fund available with the the assessee are more than the amount that is invested which can possibly earn the tax-free income. In view of this we agree with the contention of the Ld. authorised representative that in absence of any exempt income earned by the assessee during the year the disallowance under section 14 A of the act can not be made. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition under Section 14A of the Income Tax Act.
2. Utilization of common bank account/source of funds for earning exempt income.
3. Interest-bearing funds and tax-free investments.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 14A of the Income Tax Act
The Revenue appealed against the CIT(A)'s order which deleted the addition of ? 97,11,237 under Section 14A, arguing that the assessee did not specify any expenditure attributable to exempt income. The assessee, engaged in developing wireless Internet solutions, filed its return showing no exempt income for the assessment year 2009-10. The Assessing Officer (AO) invoked Section 14A and Rule 8D to disallow expenses amounting to ? 97,11,237, despite the assessee's objections. The CIT(A) deleted the disallowance, noting that the investments were made in earlier years and not from credit facilities. The Tribunal upheld the CIT(A)'s decision, noting no exempt income was earned during the year, and thus, no disallowance under Section 14A was warranted.

Issue 2: Utilization of Common Bank Account/Source of Funds for Earning Exempt Income
The Revenue contended that the common bank account and resources were used for earning exempt income. However, the Tribunal found that the assessee demonstrated the investments were made from shareholders' funds, which were more than the investments made. The AO did not record any satisfaction regarding the assessee's explanation that no expenditure was incurred for earning exempt income. The Tribunal agreed with the assessee's contention and supported its decision with the Delhi High Court's ruling in Principal Commissioner of Income-tax v. IL & FS Energy Development Company Ltd., which stated that if no exempt income is earned, disallowance under Section 14A cannot be made.

Issue 3: Interest-Bearing Funds and Tax-Free Investments
The Revenue argued that the assessee extended interest/dividend-free loans to a subsidiary while high-interest amounts were debited to the Profit & Loss account on borrowed loans. The Tribunal found that the assessee's investments were significantly less than the available shareholders' funds, indicating no interest-bearing funds were used for tax-free investments. The Tribunal referenced the Delhi High Court's decision in Cheminvest Ltd. v. Commissioner of Income Tax, which held that Section 14A does not apply if no exempt income is received during the assessment year.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletion of the addition under Section 14A. It concluded that no disallowance was warranted as no exempt income was earned during the assessment year, and the investments were made from shareholders' funds. The Tribunal's decision was supported by relevant High Court rulings, emphasizing the necessity of actual exempt income for disallowance under Section 14A. The order was pronounced in the open court on 01/09/2017.