2017 (11) TMI 1350 - AT - Income Tax

Disallowance u/s. 14A - material to establish the direct nexus between the expenditure incurred and the income not forming part of total income - Held that - We observe that during the impugned year, assessee has not made any fresh investment. The assessee had total net worth of ₹ 321.82 crores and total investment in subsidiaries is ₹ 113.16 crores, out of which 0.18 crores is in foreign subsidiaries and rest amount of ₹ 112.98 crores has been invested in Indian subsidiary companies. The dividend received from foreign subsidiary companies is taxable. It is evident from the record available before us that the assessee has not paid any interest for making investment in subsidiaries and no fresh investment has also been made during the year. The ld. CIT(A), after considering the submissions of the assessee and the order of the Assessing Officer has made good reasoned order in deleting the disallowance u/s. 14A of expenditure - Decided against revenue

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

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

The Revenue appealed against the CIT(A)'s decision to delete the disallowance of ?64,00,223/- under Section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) had observed that the assessee invested in equity shares, income from which is exempt from tax, and thus invoked Section 14A read with Rule 8D to disallow the expenditure related to these investments. The AO calculated the disallowance as half a percent of the average value of the investment, amounting to ?64,00,223/-. The CIT(A) allowed the assessee's appeal, following decisions from previous assessment years (2010-11 and 2011-12) where similar disallowances were deleted.

The Revenue contended that even if the assessee invested out of its own funds, incidental expenses for making investments and collecting dividends could not be denied, justifying the AO's invocation of Section 14A. However, the Tribunal noted that during the year in question, the assessee made no fresh investments and had not paid any interest for the investments in subsidiaries. The Tribunal also observed that the assessee did not earn any dividend income during the year from these investments.

The CIT(A) had relied on several judicial precedents to support its decision, including the principle that Section 14A disallowance is not applicable where no exempt income is earned during the year. Key cases referenced included:
- Garware Wall Ropes Ltd.: Held that Section 14A does not apply if the primary objective of the investment is to hold a controlling stake rather than to earn income.
- CIT vs. Holcim India Pvt. Ltd.: Confirmed that Section 14A disallowance is not applicable if the business of the assessee as an investment company is genuine and expenses are incurred for business activities.
- Cheminvest Ltd. vs. CIT: Clarified that Section 14A requires actual receipt of income which is not includible in total income, and hence does not apply where no exempt income is received or receivable during the relevant previous year.
- CIT vs. Shivam Motors Pvt. Ltd.: Stated that in the absence of any tax-free income, corresponding expenditure could not be worked out for disallowance.
- CIT vs. Corrtech Energy Pvt. Ltd.: Held that Section 14A has no application where the assessee did not make any claim for exempt income.

The Tribunal found no reason to interfere with the CIT(A)'s order, as the Revenue did not challenge the CIT(A)'s decisions for the preceding years or provide any material to contradict the findings. Therefore, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance under Section 14A.

Judgment: The appeal by the Revenue was dismissed.

Order pronounced in the open court on 23.11.2017.