2018 (4) TMI 933 - AT - Income Tax

Disallowance u/s 14A - Held that - In view ratio of decision of Hon‟ble Supreme Court in the case of Maxopp Investment Limited (2018 (3) TMI 805 - SUPREME COURT OF INDIA) we hold that Section 14A of the 1961 Act is applicable even if the assessee had made strategic investments in subsidiary companies and the same cannot be excluded - decided against the assessee. Section 14A disallowance applicability - investments in IDFC Cash fund - Super Inst Plan C Growth‟ - contentions of the assessee Sh. Hiro Rai, the growth funds invested by the assessee does not declare dividend which could be claimed as an exempt income nor any other exempt income arises from the said growth funds, and hence question of applicability of Section 14A does not arise - Held that - It is critical and important for the AO to go through the scheme of issue of IDFC Cash fund - Super Inst Plan C Growth fund which was issued by IDFC , in which the assessee has claimed to have invested ₹ 72.64 crores, and then to arrive at conclusion whether the assessee is entitled to receive any exempt income from said growth fund issued by IDFC as per terms of the scheme . Thus after evaluation of terms and conditions of the scheme to arrive at conclusion as to applicability of Section 14A r.w.r. 8D2(iii) of the 1962 Rules . The assessee is directed to file the entire scheme of issue of IDFC Cash fund - Super Inst Plan C Growth, before the AO. The matter is set aside and restored to the file of the AO for fresh adjudication on merits in accordance with law after considering the submissions of the assessee/evidence filed by the assessee which shall be admitted by AO in the interest of justice

Summary

Issues:
1. Disallowance of expenses under section 14A r.w.r. 8D of the Income Tax Act, 1961.
2. Exclusion of strategic investments in subsidiary companies for computing disallowance u/s 14A.
3. Exclusion of investments in Growth Plan of Mutual Fund for computing disallowance u/s 14A.
4. Assessment of disallowances made by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals).

Issue 1 - Disallowance of expenses under section 14A r.w.r. 8D:
The appeal was filed against the appellate order confirming disallowance of expenses under section 14A r.w.r. 8D of the Income Tax Act, 1961. The Assessing Officer invoked Section 14A and Rule 8D of Income-tax Rules, 1962 to disallow expenses indirectly attributable to income not forming part of the total income. The disallowance was calculated based on a formula resulting in a total disallowance of ?5,183,992. The Commissioner of Income-tax (Appeals) granted partial relief to the assessee, upholding certain disallowances while granting relief in other aspects. The Revenue did not appeal against the part relief granted, leading to the issue being restricted to the disallowance made by the Assessing Officer under Section 14A r.w.r. 8D.

Issue 2 - Exclusion of strategic investments in subsidiary companies:
The assessee contended that strategic investments in subsidiary companies should be excluded from computing disallowance under Section 14A. However, the Tribunal dismissed this ground citing a recent decision of the Supreme Court which held that Section 14A is applicable even if strategic investments are made in subsidiary companies. The appeal on this ground was decided against the assessee.

Issue 3 - Exclusion of investments in Growth Plan of Mutual Fund:
The primary issue raised by the assessee was the exclusion of investments in a Growth Plan of Mutual Fund for the purpose of disallowance under Section 14A r.w.r. 8D2(iii). The assessee argued that the growth funds did not generate any tax-free income, and hence, the applicability of Section 14A was questioned. The Tribunal considered previous decisions and concluded that investments in growth funds should be excluded for computing disallowance under Rule 8D. The matter was set aside for the Assessing Officer to evaluate the scheme of the growth fund and determine the applicability of Section 14A r.w.r. 8D2(iii) based on the terms of the scheme.

Issue 4 - Assessment of disallowances made by the Assessing Officer:
The Tribunal reviewed the disallowances made by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals). While certain disallowances were confirmed, others were set aside for fresh adjudication based on the terms and conditions of the investment schemes. The matter was restored to the Assessing Officer for a reevaluation on merits in accordance with the law, ensuring the assessee's submissions and evidence are considered. Proper opportunity for a hearing was directed to be provided to the assessee in line with legal principles and natural justice.

This detailed analysis covers all the issues involved in the legal judgment comprehensively, addressing the arguments, decisions, and implications of each issue raised in the appeal.