2020 (2) TMI 732 - HC - Income Tax

Disallowance u/s 14-A - investments in group companies - Whether it is not the object for which the investment was made but the quality of income tax-exempt or otherwise that arises from the investment needs to be considered for the purpose of section 14A of the Income Tax Act 1961? - HELD THAT - Appellant submits that the above two questions have been decided by the Supreme Court against the revenue and in favour of the assessee in CIT v/s. Essar Teleholdings Ltd. 2018 (2) TMI 115 - SUPREME COURT . That apart on identical issue Delhi High Court upheld the order passed by Tribunal that in the absence of any exempt income disallowance under Section 14-A of the Act was not permissible. A Special Leave Petition filed by the revenue against the said decision has been dismissed by the Supreme Court in Principal Commissioner of Income-Tax v/s. Oil Industry Development Board 2019 (3) TMI 1571 - SC ORDER - Decided against revenue.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961 for investments in group companies.
2. Consideration of the quality of income arising from investments for disallowance under Section 14A.

Analysis:
1. The appellant raised questions regarding the deletion of disallowance under Section 14A of the Income Tax Act, 1961, for investments in group companies. The Tribunal had deleted the disallowance, which the revenue challenged in the appeal. The Court noted that similar issues had been decided by the Supreme Court and the Delhi High Court in favor of the assessee. Referring to the decision in CIT v/s. Essar Teleholdings Ltd., 401 ITR 445, and the case of Principal Commissioner of Income-Tax v/s. Oil Industry Development Board [2019] 103 taxmann.com 326(SC), the Court found no merit in the appeal. The Court emphasized that in the absence of any exempt income, disallowance under Section 14-A of the Act was not permissible. Therefore, the appeal was dismissed, and no costs were awarded.

2. Another question raised was whether the Tribunal was justified in deleting the disallowance under Section 14A without considering the quality of income arising from the investments. The Court's decision was based on the precedent set by the Supreme Court and the Delhi High Court, which upheld that disallowance under Section 14-A was not applicable in the absence of exempt income. The Court's analysis focused on the legal principles established in previous judgments, emphasizing that the nature of income, whether tax-exempt or otherwise, needed to be considered for the purpose of Section 14A of the Income Tax Act, 1961. The Court's decision to dismiss the appeal was in line with the established legal interpretations and precedents, ensuring consistency in the application of tax laws and principles.