2017 (6) TMI 69 - AT - Income Tax

Disallowance under section 14A - Held that - What is relevant to examine is whether any expenditure sought to be disallowed had actually been incurred in earning the dividend income. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which do not form part of the total income. No reasonable nexus between the expenditure disallowed and the dividend income received has been established by the AO. It is equally relevant to note that out of ₹ 30.82 crores worth of investments in subsidiary/associate concerns, an amount of ₹ 6.50 lacs has been invested during the year out of company s own funds and the rest all investments have been made in the earlier years wherein the AO has not established any reasonable nexus between the expenditure disallowed and the dividend income received in the respective years. Further, in earlier years, the Coordinate Benches have decided the matter in favour of the assessee company holding no disallowance under section 14A other than the administrative expenses suo-moto disallowed by the assessee company and we see no reason to deviate from the same. AO has lost sight of the fact that the assessee company is in the business of financing wherein the funds are borrowed and lend as part of its regular business activity. Therefore, looking at interest expenditure of ₹ 180.91 crores without taking into consideration interest earned on loans/advances to its customers amounting to ₹ 370.69 crores will not be factually correct. - Decided against revenue

Summary

Issues:
- Whether the Ld. CIT(A) erred in deleting the entire addition made by the AO under section 14A of the Act, 1961.
- Whether the Ld. CIT(A) erred in appreciating the expenses quoted by the assessee for earning exempt income.

Issue 1: Addition under Section 14A of the Act, 1961

The appeal filed by the Revenue challenged the deletion of the addition made by the AO under section 14A of the Act, 1961. The AR argued that the issue was covered by the Supreme Court's decision in the case of Godrej & Boyce Manufacturing Company Ltd. The Supreme Court emphasized the requirement of proving that the expenditure sought to be disallowed was actually incurred in earning the dividend income. The Court highlighted that the Assessing Officer must be satisfied with the claim of the assessee before making any disallowance. The Coordinate Bench in a previous case for A.Y. 2011-12 held that the AO must establish a reasonable nexus between the disallowed expenditure and the dividend income received. The Bench emphasized that the provisions of section 14A cannot be invoked mechanically and that the AO must determine the expenditure incurred in relation to exempt income. In the present case, the AO failed to provide any basis for disallowance and did not establish a connection between the disallowed expenditure and the dividend income. The Bench upheld the CIT(A)'s decision to delete the disallowance, citing lack of contrary evidence from the Revenue.

Issue 2: Quoted Expenses for Exempt Income

The second issue revolved around the appreciation of expenses quoted by the assessee for earning exempt income. The AO contended that part of the interest expenditure could be attributable to earning exempted income due to the dividend income earned by the assessee. However, the AO's observations lacked consideration of the nature of the business and failed to establish a reasonable nexus between the expenditure and the dividend income. The Coordinate Benches in earlier years favored the assessee, ruling out disallowance under section 14A apart from administrative expenses. The AO overlooked that the company was in the financing business, borrowing funds for lending activities, which impacted the interest expenditure analysis. The decision of the Hon'ble Supreme Court and previous rulings in favor of the assessee led to the dismissal of the Revenue's appeal.

In conclusion, the ITAT Jaipur dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition under section 14A of the Act, 1961. The judgment emphasized the importance of establishing a reasonable nexus between disallowed expenditure and dividend income, as well as considering the nature of the business when analyzing expenses for earning exempt income.