2022 (10) TMI 497 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenditure incurred for earning dividend income from an overseas company in Oman - as submitted assessee is effectively not paying any tax on the said income either in the source country or in India and thus, dividend income for all purposes is exempted from tax - HELD THAT - This Court is of the opinion that in view of Section 14A(1), no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. As per Section 2(45) of the Act, total income means the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Therefore, Section 14A pertains to disallowance of deduction in respect of income which does not form part of the total income. Since the dividend received by the assessee from OMIFCO, Oman is chargeable to tax in India under the head Income from other sources and forms part of the total income, the same is included in taxable income in the computation of income filed by the assessee. However, rebate of tax has been allowed to the assessee from the total taxes in terms of Section 90(2) of the Income Tax Act read with Article 25 of the Indo Oman, DTAA and thus, the dividend earned can be said to be in the nature of excluded income and, therefore, the provisions of Section 14A would not be attracted in this case. This Court in the case of CIT vs. M/s Kribhco 2012 (7) TMI 591 - DELHI HIGH COURT has held that provisions of Section 14A are inapplicable as far as deductions, which are permissible and allowed under Chapter VIA are concerned. No substantial question of law arises.

Summary

Issues:
Challenge to ITAT order disallowing expenditure for earning dividend income from an overseas company under Section 14A of the Income Tax Act, 1961.

Analysis:
The appeal challenged the ITAT order disallowing expenditure incurred for earning dividend income from an overseas company in Oman under Section 14A of the Income Tax Act, 1961. The appellant argued that the dividend income from the overseas company is exempt from tax in both Oman and India due to tax sparing credit under the India-Oman DTAA. The ITAT was criticized for not recognizing that the assessee effectively pays no tax on this income in either country, leading to the exemption of dividend income from tax. The ITAT's decision to restrict disallowance to a lesser amount compared to the Assessing Officer's disallowance was also contested.

The Court examined Section 14A(1) which disallows deductions for expenditure related to income not forming part of the total income under the Act. Since the dividend income from the overseas company is taxable in India and forms part of the total income, it is included in the taxable income. However, the assessee is allowed a tax rebate under Section 90(2) of the Income Tax Act and Article 25 of the India-Oman DTAA, treating the dividend as excluded income. Consequently, the provisions of Section 14A do not apply in this scenario.

Referring to the case of CIT vs. M/s Kribhco, the Court highlighted that Section 14A does not apply to deductions allowed under Chapter VIA. The judgment emphasized that income qualifying for deductions under Chapter VI-A is included in the total income before deductions are allowed. Chapter VI-A does not mandate that such incomes are excluded from the total income. Therefore, as the dividend income in question qualifies for deductions under Chapter VIA, it is considered part of the total income and not subject to disallowance under Section 14A.

In conclusion, the Court found no substantial question of law for consideration in the appeal and dismissed the same.