2014 (9) TMI 434 - HC - Income Tax

Dividend on income disallowed u/s 14A - Whether the Tribunal was right in deleting the disallowance u/s 14A holding that no dividend income was earned by the assessee ignoring the provisions u/s 14A Held that - The Tribunal rightly observed that there was a contradiction in the submissions made by the revenue that the assessee had acquired shares for earning of dividends relying upon Additional Commissioner of Income-tax, Circle 1(1) Versus Spray Engineering Devices Ltd. 2012 (7) TMI 587 - ITAT CHANDIGARH - Income exempt u/s 10 in a particular AY, may not have been exempt earlier and can become taxable in future years - whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent AY LTCG on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax - assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. The entire or whole expenditure has been disallowed as if there was no expenditure incurred by the assessee for conducting business - CIT(A) has positively held that the business was set up and had commenced - Expenditure had to be also incurred to protect the investment made - genuineness of the expenses and the fact that it was incurred for business activities was not doubted by the AO and has also not been doubted by the CIT(A) Decided against revenue.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in deleting the disallowance under Section 14A of the Income Tax Act, 1961 for the Assessment Years 2007-08 and 2008-09.

Issue-wise Detailed Analysis:

1. Disallowance Under Section 14A of the Income Tax Act, 1961:

The primary issue in the appeals was whether the Income Tax Appellate Tribunal was correct in deleting the disallowance under Section 14A of the Income Tax Act, 1961, amounting to Rs. 8,61,50,315/- for the Assessment Year 2007-08 and Rs. 6,60,93,678/- for the Assessment Year 2008-09. The Tribunal had held that no dividend income was earned by the assessee, thus ignoring the provisions under Section 14A.

2. Business Activities and Commencement:

The respondent-assessee, a subsidiary of Holderind Investments Ltd., Mauritius, was formed as a holding company for making downstream investments in cement manufacturing ventures in India. The Assessing Officer held that the respondent-assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investments. Consequently, the entire expenditure of Rs. 8.75 Crores for the Assessment Year 2007-08 and Rs. 7.02 Crores for the Assessment Year 2008-09 was disallowed.

3. CIT(A)'s Findings:

The CIT(A) disagreed with the Assessing Officer's findings, observing that the respondent-assessee had been set up with the business objective of making investments in the cement industry after due approval from the Government of India. The CIT(A) noted that the respondent-assessee was not to undertake any manufacturing activity themselves but was to make investments in Ambuja Cement Ltd. The CIT(A) held that the business of the respondent-assessee was set up and commenced, and the expenditure incurred was for business purposes and thus allowable under Section 37 of the Act.

4. Application of Section 14A:

The CIT(A) issued a notice to the assessee regarding the applicability of Section 14A, which postulates that no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of the total income. The CIT(A) held that since the business of the respondent-assessee was to act as a holding company for downstream investments, the provisions of Section 14A were applicable. The CIT(A) relied on the decision of the Special Bench of the Tribunal in Cheminvest Ltd. Vs. ITO and Maxopp Investment Ltd. Vs. CIT to support the disallowance under Section 14A.

5. Tribunal's Findings:

The Tribunal reversed the CIT(A)'s findings, noting that the business had been set up and the CIT(A) did not make disallowance on the ground that the respondent-assessee had invested in shares for earning dividends but on the ground that the respondent-assessee had acquired controlling interest in the respective companies as their line of business. The Tribunal observed a contradiction in the submissions made by the departmental representative and allowed the appeal of the respondent-assessee.

6. High Court's Observations:

The High Court noted the confusion in the Revenue's stand and the ambiguity in the CIT(A)'s reasoning. The Court referred to decisions from various High Courts, including the Punjab and Haryana High Court, Gujarat High Court, and Allahabad High Court, which held that Section 14A cannot be invoked when no exempt income was earned. The Court highlighted that the entire expenditure was disallowed as if no expenditure was incurred for conducting business, despite the CIT(A)'s finding that the business was set up and had commenced. The genuineness of the expenditure and its necessity for business activities were not doubted by the Assessing Officer or the CIT(A).

Conclusion:

The High Court dismissed the appeals, affirming that the Tribunal was correct in deleting the disallowance under Section 14A for the Assessment Years 2007-08 and 2008-09, as no exempt income was earned by the respondent-assessee. The Court emphasized that the business had commenced, and the expenditure incurred was for legitimate business purposes.

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