2017 (10) TMI 176 - AT - Income Tax

Disallowance u/s. 14A read with Rule 8D - sufficiency of funds - Held that - It is evident that the assessee had sufficient own funds, which were utilised for making any investment in inventories and to sundry debtors to the tune of ₹ 18.19 crores and for making new investment in shares of M/s HAIL of ₹ 6,63,30,000. In addition, the assessee company had current year s profit of ₹ 6.85 crores. Under the circumstances, I hold that the new investment of ₹ 6.63 crores made in the shares of M/s HAIL, the subsidiary company was made out of own funds of the assessee and not from the borrowed funds. Accordingly, no disallowance under Section 14A could have been made. Regarding the administrative expenses in respect of making such an investment, evidently the investment has been made in the subsidiary company, therefore, no effort in the form of market research, monitoring and seeking paid assistance of professionals in making such investment was needed. Accordingly, we hold that no administrative efforts can be attributed to making of investment in the shares of HAIL, the subsidiary company. On careful consideration of the reasoning given by the AO for making the addition under Rule 8D in the assessment order, we find that the AO has not examined the claim of the assessee in this regard. Moreover, the AO did not consider that investment of ₹ 18.75 crores was deleted by the ITAT and the new investment of ₹ 6.63 crores was also made in the same manner out of own fund of the assessee for the purpose of making investment in subsidiary company for the purpose of core business of the assessee. Further, it has already held that no administrative expenses can be attributed to making such an investment in the subsidiary company. Keeping in view the same, we find that the lack of satisfaction of the AO with the claim of the AO is not on cogent grounds. Accordingly, the AO could not have invoked the provisions of Rule 8D, in the light of the binding decision of the Hon ble Delhi High Court in the case of CIT Vs. Maxopp Investments (2011 (11) TMI 267 - Delhi High Court ).- Decided against revenue

Summary

Issues:
1. Disallowance under section 14A read with Rule 8D
2. Interpretation of circular no. 5/2014 regarding disallowance of expenditure
3. Disallowance for managing investment without actual expenditure
4. Applicability of Rule 6DD(f) for cash purchases

Analysis:

Issue 1: Disallowance under section 14A read with Rule 8D
The Revenue appealed against the deletion of an addition of ?1,25,52,405 made under section 14A read with Rule 8D. The Assessing Officer (AO) invoked Rule 8D due to the lack of disallowance for expenses incurred for investments over ?25.38 crores. The assessee argued that the investment in its subsidiary was for strategic control, not for earning dividends. The Tribunal held that the investment was for the core business purpose, not for earning dividends, and cited relevant case laws to support this position. It was concluded that no disallowance under section 14A should have been made.

Issue 2: Interpretation of circular no. 5/2014
The Revenue contended that the circular no. 5/2014 supported the disallowance of expenditure even without earning exempt income. However, the Tribunal found that the investment in the subsidiary was for business purposes, not for earning dividends, hence the circular did not apply in this context.

Issue 3: Disallowance for managing investment without actual expenditure
The AO disallowed expenses related to managing investments of ?25,28,30,000 under section 14A. The assessee argued that no actual expenditure was incurred for earning dividend income. The Tribunal found that the AO did not examine the claim properly and that no administrative expenses could be attributed to the investment in the subsidiary company. The lack of satisfaction of the AO with the claim was not on cogent grounds, leading to the deletion of the addition.

Issue 4: Applicability of Rule 6DD(f) for cash purchases
The AO disallowed cash purchases made by the assessee under Rule 6DD(f). The assessee claimed purchases were made directly from growers/farmers/villagers, falling under Rule 6DD(f). However, the AO found the claim unverifiable due to lack of details. The Tribunal upheld the AO's decision, leading to the disallowance of cash purchases.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s decision to delete the additions in dispute, emphasizing that the investments were made for business purposes, not for earning dividends, and the disallowances were not justified based on the facts presented.