2017 (8) TMI 1128 - AT - Income Tax

Disallowance u/s 14A - Held that - As there was no exempted income earned by the assessee. As such the disallowance made by the AO was rightly deleted by the ld. CIT(A). We, therefore, do not see any merit in this appeal of the department. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance made by the AO under Section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 14A:

Facts and AO's Findings:
The assessee filed a return declaring an income of ?16,28,64,616/- and later revised it without changing the declared income. During scrutiny, the AO noticed that the assessee claimed a dividend income of ?142.50 Crores as exempt. The AO, unsatisfied with the assessee's explanation, disallowed ?4,90,88,000/- under Section 14A read with Rule 8D, reasoning that the assessee must have incurred indirect expenses to earn the exempt income. The AO detailed that the decision-making process for investments and their maintenance would have entailed some expenditure, thus justifying the disallowance. The AO also cited various judicial precedents to support the disallowance.

Assessee's Appeal to CIT(A):
The assessee argued that the AO misapplied Section 14A and Rule 8D, stating that the investments were made to fulfill business objectives, not to earn exempt income. The assessee clarified that no exempt income was received during the assessment year, and the AO incorrectly noted the receipt of ?142.50 Crores as dividend income, which was actually proposed dividend.

CIT(A)'s Observations and Decision:
The CIT(A) accepted the assessee's submission, noting that the investments were made in joint venture companies for running various airports and were business decisions, not aimed at earning exempt income. The CIT(A) found that the assessee received ?940.97 Crores as taxable business income from these investments. It was also noted that the AO's observation about the receipt of ?142.50 Crores as dividend was incorrect. The CIT(A) referenced several judicial decisions, including the Delhi High Court's ruling in CIT Vs. Oriental Structural, which held that Section 14A does not apply to investments made for business purposes. Consequently, the CIT(A) deleted the disallowance.

Department's Appeal and Tribunal's Decision:
The department appealed against the CIT(A)'s order, but the Tribunal upheld the CIT(A)'s decision. The Tribunal noted that the AO incorrectly mentioned the receipt of ?142.50 Crores as dividend, which was actually proposed dividend, and the assessee did not receive any exempt income during the year. The Tribunal referred to the Delhi High Court's decision in Cheminvest Ltd. Vs CIT, which clarified that Section 14A does not apply if no exempt income is received or receivable during the relevant year. Since the assessee did not earn any exempt income, the disallowance under Section 14A was unwarranted. Thus, the Tribunal dismissed the department's appeal.

Conclusion:
The Tribunal confirmed that the disallowance under Section 14A was not applicable as the assessee did not receive any exempt income during the relevant assessment year. The CIT(A)'s decision to delete the disallowance was upheld, and the department's appeal was dismissed.