2016 (6) TMI 1082 - AT - Income Tax

Disallowance u/s 14A - whether section 14A read with Rule 8D is applicable when the assessee company has neither borrowed any money to be invested in shares nor earned any exempt dividend income during the year under assessment? - Held that - Merely, on the basis of fact that during the preceding years as well as succeeding years, assessee company has earned the dividend income, the disallowance u/s 14A read with Rule 8D cannot be made because earning of dividend on investment in shares depends upon the company performance etc. AO, without rejecting the books of account, computed the deemed expenses at 0.5% of average investment and also computed the interest expenses in the face of the undisputed facts that assessee has not borrowed any funds for the purpose of investment in shares during the year under assessment. Admittedly, when the AO and ld. CIT (A) have not disputed the books of account as well as tax audit report and computation of income which apparently proved the contention of the assessee that no dividend income has been received during the year under assessment nor it has borrowed any funds to invest in the share to earn the dividend income, the question of making disallowance by invoking provisions u/s 14A read with Rule 8D does not arise. Thus when the assessee company has not incurred any expenditure to earn the exempt income, no disallowance can be made u/s 14A of the Act read with Rule 8D of the Rules, hence the impugned order passed by the ld. CIT (A) is not sustainable in the eyes of law. - Decided in favour of assessee

Summary

Issues:
Applicability of Section 14A read with Rule 8D when no dividend income earned or funds borrowed for investment.

Analysis:
The case involved an appeal by M/s. Sunrays Properties & Investment Co. Pvt. Ltd. against the order passed by the Commissioner of Income-tax (Appeals) regarding the assessment year 2008-09. The primary contention was the applicability of Section 14A read with Rule 8D to the assessee company, which had neither earned any dividend income nor borrowed funds for investment during the assessment year. The Assessing Officer (AO) had disallowed an amount under Section 14A, which led to a reduction in the returned loss of the assessee.

The facts revealed that the assessee had made investments in equity shares of listed companies without incurring any expenses related to earning exempt dividend income. The AO computed the disallowance under Section 14A read with Rule 8D, which was contested by the assessee. The matter was taken to the ld. CIT (A) who upheld the AO's decision, prompting the assessee to appeal to the Tribunal.

During the proceedings, the assessee argued that as it was engaged in the business of trading in shares and had not earned any dividend income during the assessment year, the provisions of Section 14A were not applicable. The assessee provided details to support its claim that no funds were borrowed for investments yielding dividend income exempt under Section 10(34) of the Income Tax Act.

The Tribunal examined the contentions of both parties and reviewed the documents and orders of the revenue authorities. The ld. CIT (A) affirmed the AO's decision based on the assessee's receipt of dividend income in preceding and succeeding years, holding that certain expenses were attributable to the exempt income.

The Tribunal deliberated on whether Section 14A read with Rule 8D applied when no funds were borrowed for investment and no dividend income was earned during the assessment year. Citing relevant case laws, the Tribunal emphasized that if no expenditure was incurred in connection with exempt income, no disallowance could be made under Section 14A. Since the books of account and tax audit report confirmed the absence of dividend income and borrowed funds for investment, the Tribunal concluded that no disallowance could be made under Section 14A read with Rule 8D.

In light of the above analysis, the Tribunal allowed the appeal of the assessee, holding that the impugned order was not legally sustainable. The Tribunal ruled in favor of the assessee, emphasizing that when no expenditure was incurred to earn exempt income, no disallowance could be made under Section 14A read with Rule 8D.