2018 (4) TMI 738 - AT - Income Tax

Disallowance u/s.14A - Held that - The assessee was holding long term investments of ₹ 32.64 crores as at the beginning of the year and of ₹ 32.64 lacs as at the end of the year; that except for a miniscule investment of ₹ 15,000/- in unquoted Government securities, all the investments as at the beginning of the year were strategic investments in Appellant s subsidiary companies; that all these investments came to be transferred to Arvind Limited with effect from 1st January, 2011 upon the Hon ble Gujarat High Court passing an order dated 29/11/2011 approving demerger of the Appellant s Investments Division which thereupon stood transferred to Arvind Limited. All the investments as at the end of the year viz. ₹ 32.64 lacs had been made by the revenue this year from its own funds in its subsidiary companies only; that thus, these investments too were strategic investments. Assessee was engaged in the business of trading of cloth and readymade garments; that its entire turnover of ₹ 94.85 crore came from this business; that on the other hand, as explained before, the Appellant s investments were confined to strategic investments in its subsidiaries only. As assessee has not earned any tax free income and therefore, no expenses can be construed as incurred by the assessee we dismiss appeal of the department and in our opinion ld. CIT(A) has passed detailed and reasoned order. - Decided in favour of assessee

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The primary issue in this appeal is whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the disallowance of ?36,99,631/- under Section 14A of the Income Tax Act.

Facts of the Case:
The assessee company had made investments in shares, the income from which is exempt from tax. The assessee had also claimed interest payment on loans and incurred other expenses. However, the assessee did not deduct these interest payments/expenses related to the investment in shares for earning interest. The Revenue argued that expenditure related to investment in shares and securities should be disallowed under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Assessee's Submission:
The assessee contended that the investments were strategic investments in group and subsidiary companies, which do not require constant monitoring. The interest cost of ?3,46,973/- was related to a loan from HDFC Bank and had been disallowed while computing business income to avoid litigation. The assessee also argued that administrative expenses were general business expenses necessary for any organization and not related to investment activities. The assessee provided a detailed breakup of expenses, showing that most expenses were directly related to its trading business and not to earning exempt income.

Revenue's Argument:
The Revenue did not accept the assessee's submission, stating that Section 14A provides for disallowance if expenditure is incurred in relation to income that does not form part of the total income. The Revenue argued that the assessee had made investments to earn dividend income, which is exempt from tax, and failed to substantiate that no expenditure was incurred in the investment activity.

CIT(A)'s Decision:
The CIT(A) partly allowed the appeal of the assessee, leading to the Revenue's appeal before the Tribunal.

Tribunal's Analysis:
The Tribunal reviewed the relevant records and the impugned order. The assessee argued that since it had not earned any tax-free income during the year, there was no basis for disallowance under Section 14A. The assessee's investments were strategic and made from its own funds, and its primary business was trading in cloth and readymade garments. The Tribunal noted that the assessee's entire turnover of ?94.85 crore came from its trading business, and the investments were confined to strategic investments in subsidiaries.

Precedent Cited:
The Tribunal referred to a decision of the Co-ordinate Bench in the case of Amjay Medi.Max (India) Pvt. Ltd. vs. DCIT, where it was held that if no tax-free income was earned by the assessee, no expenses could be construed as incurred by the assessee. The Tribunal concluded that the CIT(A) was justified in deleting the disallowance, as the assessee had not earned any tax-free income.

Conclusion:
The Tribunal dismissed the Revenue's appeal, agreeing with the CIT(A) that no disallowance under Section 14A was warranted since the assessee had not earned any tax-free income. The Tribunal emphasized that the CIT(A) had passed a detailed and reasoned order.

Outcome:
The appeal filed by the department was dismissed.

This Order was pronounced in Open Court on 04/04/2018.

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