2017 (10) TMI 1656 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenses incurred for earning exempt income in relation to investments made in equity instruments of the subsidiary company - absence of any satisfaction recorded by the AO vis- -vis the incorrectness of the claim of the assessee that no expenditure had been incurred vis- -vis the impugned investment - HELD THAT - We find that the assessee had duly demonstrated the fact that the investments made in various years was not out of borrowed funds and having demonstrated the availability of enough own funds the assessee had also duly demonstrated that there were sufficient own interest free funds for making the impugned investments. Therefore there was no reason for making any disallowance of interest. The reliance placed by the Ld. counsel for the assessee on the decision of Max India Ltd. 2017 (3) TMI 1254 - PUNJAB AND HARYANA HIGH COURT is apt wherein it has been held that if an assessee establishes that its interest free funds were equal to or more than the interest bearing funds it would be open to it to contend that presumption arises that the expenditure for earning interest income was incurred from out of its interest free funds. Thus we hold that in any case no disallowance of interest expenditure u/s. 14A was liable in the present case and the same needs to be deleted. Entire investments were strategic investments and the sole objective of the investment was not to earn dividend or capital gain on sale of such share but to provide trading platform to the general public - Undoubtedly and undisputedly the investment made in share of LSE Securities Ltd. was for the purpose of facilitating and providing a trading platform to the general public by creating a subsidiary company. Having said so the commercial expediency of making the impugned investment stands established and the interest expenditure incurred thereon cannot therefore be held to be for any non business purpose so as to warrant disallowance of the same u/s. 14A of the Act. Reliance placed by assessee on the decision of Oriental Structural Engineers Pvt. 2013 (1) TMI 720 - DELHI HIGH COURT is apt wherein it has been categorically held that the investment being attributable to commercial expedience expenses incurred in relation to the same cannot be termed to have been incurred for earning exempt income. We therefore hold that since the investments were strategic investments no disallowance could be made u/s. 14A of the Act. We therefore set aside the order of the CIT(Appeals) and direct that the disallowance made u/s. 14A be deleted. Ground of appeal No. 1 raised by the assessee allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A amounting to Rs. 3,13,578/-.
2. Satisfaction of the Assessing Officer regarding the correctness of the claim of the assessee.
3. Use of interest-free funds for making investments.
4. Strategic nature of the investments.
5. Inclusion of interest paid on member's security in disallowance calculation.

Detailed Analysis:

1. Disallowance under Section 14A:
The primary issue in the appeal was the disallowance made under Section 14A of the Income Tax Act, amounting to Rs. 3,13,578/-, which was upheld by the Commissioner of Income Tax (Appeals). The disallowance was made on account of expenses incurred for earning exempt income from investments in equity instruments of the subsidiary company, LSE Securities Limited.

2. Satisfaction of the Assessing Officer:
The assessee contended that the Assessing Officer (AO) did not record specific satisfaction regarding the incorrectness of the assessee's claim that no expenditure was incurred for earning exempt income. The AO's satisfaction, as recorded in para 2.4 of the assessment order, was found to be summarily dismissive without objective reasons. The Tribunal noted that the AO failed to provide specific reasons from the assessee's accounts to reject the claim. Citing judicial precedents, the Tribunal held that the AO's satisfaction was not objective, and thus, the disallowance made was liable to be quashed.

3. Use of Interest-Free Funds for Investments:
The assessee argued that no interest-bearing funds were used for the investments in LSE Securities Limited. The Tribunal found merit in this argument, noting that the assessee had demonstrated sufficient own funds for making the investments. The Tribunal referred to decisions of various High Courts, including the Jurisdictional High Court in the case of Max India Ltd., which supported the presumption that if an assessee has sufficient interest-free funds, those funds are presumed to be used for investments. Consequently, the Tribunal held that no disallowance of interest expenditure under Section 14A was warranted.

4. Strategic Nature of Investments:
The assessee claimed that the investments were strategic, made to provide a trading platform to the general public, and not for earning dividends or capital gains. The Tribunal agreed, noting that the investments were made to promote the objective of stock and share trading. Citing the decision of the Delhi High Court in the case of Oriental Structural Engineers Pvt. Ltd., the Tribunal held that expenses incurred for strategic investments attributable to commercial expediency could not be disallowed under Section 14A.

5. Inclusion of Interest Paid on Member's Security:
The assessee contested the inclusion of interest paid on member's security amounting to Rs. 11,80,000/- in the disallowance calculation under Section 14A. However, since the Tribunal deleted the entire disallowance under Section 14A, this ground became infructuous and did not require adjudication.

Conclusion:
The Tribunal set aside the order of the Commissioner of Income Tax (Appeals) and directed that the disallowance made under Section 14A be deleted. The appeal of the assessee was allowed in the above terms.

Order Pronounced:
The order was pronounced in the open court.