2019 (4) TMI 1529 - AT - Income Tax

Disallowance u/s 14A for expenses incurred in relation to the exempt income - CIT(A) held that the investment made by the assessee in the shares of other group concerns being strategic in nature, the disallowance u/s 14A could be made only on account of other expenses as per clause (iii) of sub-rule (2) of Rule 8D Held that - Hon ble Delhi High Court in the case of Cheminvest Ltd. vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT wherein it was held that no disallowance u/s 14A could be made if no exempt income was actually earned by the assessee in the relevant year. Since no exempt income in respect of dividend was actually earned by the assessee during the year under consideration, we respectfully follow the decision above and uphold the impugned order of the Ld. CIT(A) to the extent of relief given by him to the assessee on the issue of disallowance u/s 14A. - Decided against revenue

Summary

Issues:
1. Disallowance u/s 14A read with Rule 8D for expenses incurred in relation to exempt income.
2. Interpretation of strategic nature of investments for disallowance under clause (iii) of sub-rule (2) of Rule 8D.
3. Applicability of the decision in Cheminvest Ltd. vs CIT 378 ITR 38 on disallowance u/s 14A in absence of actual exempt income earned.

Analysis:
1. The appeal by the revenue challenged the order of Ld. CIT(A) which substantially deleted the disallowance made by the AO u/s 14A of the Act read with Rule 8D. The AO disallowed expenses incurred by the assessee in relation to exempt income, even though no dividend income was earned by the assessee on substantial investments in shares of other group companies. The disallowance was made at &8377; 1,43,60,206/- by applying Rule 8D.

2. The Ld. CIT(A) held that the investment in shares of other group concerns was strategic in nature, allowing disallowance u/s 14A only for other expenses as per clause (iii) of sub-rule (2) of Rule 8D. The Tribunal followed the decision in the assessee's own case for A.Y. 2012-13 and directed the AO to restrict the disallowance u/s 14A accordingly. The Revenue appealed this decision before the Tribunal.

3. The Tribunal considered arguments from both sides and examined relevant material. The learned DR relied on the AO's order, while the counsel for the assessee supported the Ld. CIT(A)'s decision, citing the case of Cheminvest Ltd. vs CIT 378 ITR 38. The Tribunal upheld the Ld. CIT(A)'s order based on the decision that no disallowance u/s 14A could be made if no exempt income was earned in the relevant year. As no exempt income from dividends was earned by the assessee during the year, the Tribunal dismissed the appeal of the Revenue.

This judgment highlights the application of Rule 8D for disallowance u/s 14A, interpretation of strategic investments for disallowance under specific clauses, and the impact of precedents like Cheminvest Ltd. case on determining disallowance in the absence of actual exempt income earned.