2016 (12) TMI 1544 - AT - Income Tax

Disallowance u/s 14A - investment made as a strategic investment in group companies - Held that - We hold that since the assessee has not earned any dividend income and the investments were made only as a strategic investment in wholly owned subsidiary companies no disallowance under section 14A is attracted. Thus, we direct the Assessing Officer to delete the disallowance made under section 14A in both these assessment years. - Decided in favour of assessee

Summary

Issues:
Disallowance of interest and expenses under rule 8D(2)(ii) and rule 8D(2)(iii) for assessment years 2008-09 & 2009-10 due to absence of exempt income received by the assessee.

Analysis:
The appeals were filed by the assessee against the CIT(A)'s orders for the assessment years 2008-09 & 2009-10 regarding the disallowance of interest and expenses under rule 8D(2)(ii) and rule 8D(2)(iii) due to the absence of exempt income. The assessee argued that no disallowance under section 14A should be made as no dividend income was received during these years. Citing various decisions, the assessee contended that investments were strategic in nature for gaining controlling stake, not for earning exempt income, hence disallowance was not justified.

Furthermore, the assessee highlighted substantial own funds available during the investment period, indicating investments were made from own funds, not borrowed funds. The assessee emphasized that only investments generating exempt income should be considered for disallowance under section 14A, citing relevant case laws to support this argument.

The DR relied on the lower authorities' orders, while the Tribunal considered the absence of exempt income as a crucial factor. Referring to the decision of the Hon'ble Delhi High Court, the Tribunal held that no disallowance under section 14A can be made if no exempt income is earned. The Tribunal also emphasized that strategic investments in group companies for controlling interest do not attract disallowance under section 14A, following a similar precedent.

Consequently, the Tribunal ruled in favor of the assessee, directing the AO to delete the disallowance under section 14A for both assessment years. The Tribunal concluded that since no dividend income was earned, and investments were strategic in wholly owned subsidiary companies, no disallowance under section 14A was warranted. As a result, the appeals of the assessee were allowed.