2016 (5) TMI 315 - AT - Income Tax

Disallowance u/s 14A - Held that - It is apparent that the assessee company and those companies in which the assessee has invested in shares are all Government undertakings vested with inter-related and ancillary objectives to promote the activities of port. In these circumstances, the assessee company has made strategic investments in its sister companies. Therefore, there would be no expenditure incurred for monitoring the investment activity of the assessee company in its sister companies or for making such decision. Further, it is evident that the assessee is having share capital and reserves & surplus to the extent of ₹ 5,38,04,75,152/- which is much more than the investment made by the assessee company in its sister companies amounting to ₹ 43.75 crores. Hence, it is apparent that the assessee is having interest free funds in order to make such investments. In such situation, this Bench of the Tribunal on the earlier occasion had held that when investments are made by the assessee company from its interest free funds in its sister/subsidiary companies, for strategic business reasons, then the provisions of section 14A will not be applicable. - Decided in favour of assessee MAT applicability - Held that - While computing the tax under the provisions of section 115JB of the Act which is a provision with fiction, any disallowance made by virtue of another provision with fiction viz., section 14A of the Act, cannot be added to the book profit because a provision with fiction cannot be superimposed on another provision with fiction.

Summary

Issues Involved:
1. Sustaining the addition made by the Assessing Officer by invoking the provisions of section 14A read with Rule 8D of the Income Tax Act.
2. Increasing the book profit by adding the disallowance under Rule 8D while computing the book profit in accordance with section 115JB of the Income Tax Act.

Detailed Analysis:

Issue 1: Sustaining the Addition under Section 14A read with Rule 8D

The assessee, a Government Undertaking, filed its return of income for the assessment year 2012-13 and declared its income, setting off the same with brought forward unabsorbed depreciation, and paid minimum alternative tax under section 115JB on book profit. During the assessment proceedings, the Assessing Officer made an addition concerning the disallowance of expenditure incurred for earning exempt income under section 14A read with Rule 8D, amounting to ?2,59,90,908/-. The Assessing Officer observed that the assessee had made significant investments in unquoted equity shares and received exempt dividend income. Despite the assessee's explanation that the investments were made from its own interest-free funds and accumulated profits, the Assessing Officer invoked section 14A read with Rule 8D, stating that any expenditure incurred for earning exempt income cannot be allowed as a deduction.

On appeal, the Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, referencing several judicial precedents, and concluded that the shares purchased and held would attract the provisions of section 14A. The CIT (Appeals) observed that the assessee's investments were made in equity shares and monitored by the assessee, necessitating a disallowance of interest irrespective of the sufficiency of own funds.

Before the Tribunal, the assessee argued that the investments were made in other Government undertakings as per the directions of the Ministry of Shipping, Government of India, and were connected to port activities, thus enhancing the assessee's activities. The assessee contended that these were strategic investments in sister companies, and no expenditure was incurred for monitoring these investments.

The Tribunal, after hearing both parties, concluded that the investments were made from interest-free funds for strategic business reasons in sister companies. The Tribunal cited various decisions, including those from the Chennai Bench, which held that section 14A would not apply when investments are made from interest-free funds in sister/subsidiary companies for strategic purposes. Consequently, the Tribunal directed the Assessing Officer to delete the addition made under section 14A.

Issue 2: Increasing the Book Profit under Section 115JB

Since the Tribunal held that section 14A provisions would not apply to the assessee's case, the question of disallowance under section 14A read with Rule 8D for computing tax under section 115JB did not arise. The Tribunal referenced the Chennai Bench's decision in Beach Minerals Company P. Ltd. Vs. ACIT, which stated that while computing tax under section 115JB, any disallowance made by virtue of section 14A cannot be added to the book profit because a provision with fiction cannot be superimposed on another provision with fiction.

The Tribunal further cited the Supreme Court's decision in M/s. Apollo Tyres Ltd. Vs. CIT, which clarified that the Assessing Officer has limited power to make increases and reductions as provided in the Explanation to section 115JB and cannot go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation.

Therefore, the Tribunal directed the Assessing Officer to delete the addition made under section 14A for the computation of book profit under section 115JB, and the second ground raised by the assessee was also decided in its favor.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the deletion of the additions made under section 14A and section 115JB, thereby ruling in favor of the assessee on both issues.