2017 (2) TMI 949 - AT - Income Tax

Ad-hoc disallowance u/s 14A - Held that - As said in the earlier paragraphs the assessee earned 99% dividend from only the investment was made with JSW Steel Ltd. and the rest of the 1% dividend is from the other three companies which are also group companies. In so far as the contention of the assessee that all investments are strategic investments made to have control over the business, there is no material on record to show how these investments are strategic investments and there is no intention behind these investments to earn dividend income. At the same time, we noticed that the assessee has earned this dividend income only from four companies from the investments made in the previous year but not in the current assessment year. Therefore, even assuming that there should be some expenditure which could have been incurred by the assessee in earning exempt income in the circumstances of the present case disallowing ₹ 70,00,000/- on adhoc basis out of total expenditure of ₹ 86,08,855/- debited to P&L a/c is totally unjustified. Therefore, we direct the A.O to disallow 20% of the expenditure debited to P&L a/c as the reasonable expenditure which can be said to be attributable for earning the dividend income. - Decided partly in favour of assessee.

Summary

Issues:
- Ad-hoc disallowance of ?70,00,000/- u/s 14A of the Act.

Analysis:
1. The appeal pertains to an order by CIT(A)-10, Mumbai for the assessment year 2007-08 under Section 143(3) r.w.s 254 of the IT Act. The sole issue raised by the assessee is the confirmation of an ad-hoc disallowance of ?70,00,000/- u/s 14A of the Act by the CIT(A).

2. The assessing officer disallowed ?81,30,631/- u/s 14A during the assessment, which was confirmed by the CIT(A). The Tribunal, in an earlier order, had remanded the matter back to the assessing officer for fresh examination. Subsequently, a new assessment order was passed disallowing ?70,00,000/- as expenses incurred for earning dividend income of ?36,90,56,836/-.

3. The assessee argued that the investments were strategic and not made to earn dividend income, citing the case of Twinkle Enviro Tech Ltd. vs. DCIT. The assessing officer and CIT(A) upheld the disallowance, considering the quantum of exempt dividend income earned by the assessee.

4. The Tribunal noted that 99% of the dividend income was from a single company, JSW Steel Ltd., and the rest from group companies. It found no evidence to support the claim that the investments were strategic. The Tribunal directed the assessing officer to disallow 20% of the total expenditure debited to the P&L account as reasonably attributable to earning dividend income.

5. The Tribunal concluded that the ad-hoc disallowance of ?70,00,000/- was unjustified and directed a more reasonable estimate of expenses. The appeal was partly allowed, with the order pronounced on 17th January 2017.