2013 (1) TMI 187 - HC - Income Tax

Disallowance u/s 14A - assessee contested that as almost 99% of the assessee s income and activity pertains to tax free income/interest generated in these circumstances the quantum of disallowance i.e. 33% of the total expense was inadequate - Held that - Disallowance to be 33% which works out to Rs.38 lakhs i.e. a substantial mark-up of nearly Rs.34 lakhs over and above the disallowance reported by the assessee, the Court is of the opinion that having regard to the nature of activity engaged in by the assessee, the method adopted of apportioning 33% of the expenditure towards earning of tax free income cannot be considered to be erroneous. It is not the revenue s case that an entirely different set of employees or establishment was kept or necessitated for earning such income that income was part of the composite income reported by the assessee which included other heads as sale of investments, sale of securities etc. Applicability of Section 79 - Held that - As during the earlier period 98% of the assessee s shares were held by IIPL. The holding company was amalgamated with the assessee company. However, the shareholders of that holding company i.e. IIPL continued to be shareholders of the assessee company itself. The shareholders beneficially entitled to 98% of the shares continued to be the same. In these circumstances, the prohibition from carrying forward the losses, placed by Section 79 does not operate, on the other hand Section 79(a) makes the provision consequently inapplicable. The conclusions of the Tribunal in this regard are unexceptionable - no substantial question of law can be determined by the Court.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act
2. Interpretation of Section 79 of the Act

Disallowance under Section 14A:
The appellant, the revenue, challenged the ITAT's order regarding the disallowance under Section 14A of the Income Tax Act. The appellant contended that the methodology adopted by the Appellate Commissioner and the ITAT, determining the disallowance to be 33% of the total expenses, was not supported by law. The appellant argued that since almost 99% of the assessee's income was tax-free, the disallowance should have been higher. However, the High Court found that the method of apportioning 33% of the expenditure towards earning tax-free income was reasonable. The Court noted that the nature of the assessee's activity did not necessitate a separate establishment for earning tax-free income, and the income was part of the composite income reported by the assessee.

Interpretation of Section 79:
Regarding the applicability of Section 79 of the Act, the Tribunal analyzed the situation where 98% of the assessee's shares were held by another company, which was later amalgamated with the assessee company. The Tribunal found that despite the merger, the shareholders of the holding company remained the same and continued to hold shares in the assessee company. As a result, the prohibition under Section 79 did not apply, and Section 79(a) made the provision inapplicable. The Court upheld the Tribunal's decision, stating that no substantial question of law arose from the Tribunal's conclusions on the matter.

In conclusion, the High Court dismissed the appeal, finding it meritless based on the reasoning provided for both issues. The Court upheld the decisions of the ITAT and the Appellate Commissioner, emphasizing the reasonableness of the disallowance methodology and the non-applicability of Section 79 in the given circumstances.