2017 (4) TMI 915 - AT - Income Tax

Disallowance u/s 14A - Held that - We remit back the matter to the file of the Ld. AO to consider the issue afresh in the light of the above order of the Tribunal in the case of Lakshmi Electrical Drives Ltd 2017 (4) TMI 238 - ITAT CHENNAI and pass appropriate order in accordance with merits and law. We also make it clear that for the investments made in mutual funds, provisions of Section 14A read with Rule 8D will be applicable since the assessee would incur some expenditure at least for the decision making process as to in which mutual fund the investment has to be made and at what point of time exit from such funds. It is ordered accordingly.

Summary

Issues:
Invoking provisions of Section 14A read with Rule 8D to disallow expenditure.

Analysis:
The appeal was against the order passed by the Ld. Commissioner of Income Tax (Appeals) invoking Section 14A read with Rule 8D to disallow expenditure of ?58,26,308. The assessee, a company, had filed its return of income for the assessment year 2012-13 showing a total loss. The assessment was completed by the Ld. AO who invoked Section 14A due to exempt income earned from shares. The Ld.CIT(A) upheld the order. The assessee argued that the investments were in associate concerns for strategic reasons, thus Section 14A should not apply. The Tribunal referred to various decisions, including one involving Lakshmi Electrical Drives Ltd, where it was held that if investments are made in sister/subsidiary companies, Section 14A cannot be invoked.

The Tribunal cited multiple cases where it was held that if investments are made in sister companies for strategic purposes and not for earning exempt income, Section 14A cannot be applied. The Tribunal remitted the matter back to the Assessing Officer to re-examine the issue. It was emphasized that if investments are made in sister concerns like equity shares and share application money, Section 14A does not apply. However, for investments in mutual funds, Section 14A read with Rule 8D would be applicable. The Tribunal directed the Assessing Officer to recompute the disallowance under Section 14A if investments are made from borrowed funds. The appeal of the assessee was allowed for statistical purposes, and the matter was remitted back for fresh consideration.

In conclusion, the Tribunal held that Section 14A should not be invoked when investments are made in sister concerns for strategic reasons and not for earning exempt income. The Tribunal directed the Assessing Officer to delete the addition made under Section 14A and Rule 8D for investments in sister concerns, while also highlighting the applicability of Section 14A for investments in mutual funds. The Tribunal remitted the matter back for fresh consideration in line with the above decisions and directed the Assessing Officer to pass an appropriate order based on merits and law.