2019 (9) TMI 853 - AT - Income Tax

Disallowance u/s 14A - expenditure having direct or indirect nexus for earning the exempt income - HELD THAT - The assessee company has earned dividend income from its equity investment in Gillette Group India Pvt. Ltd., that too from the old investment and no investment has been made during the year under assessment as is evident form audited balance sheet. Even otherwise, it is settled principle of law that only actual expenditure having direct or indirect nexus for earning the exempt income can be disallowed u/s 14A of the Act. So, in these circumstances, we find no illegality or perversity in the impugned order passed by the ld. CIT (A) restricting the disallowance from ₹ 2,69,64,423/- to ₹ 25,28,619/- u/s 14A of the Act. Consequently, the appeal filed by the Revenue is hereby dismissed

Summary

Issues:
Disallowance of expenses under section 14A of the Income-tax Act, 1961.

Analysis:

Issue 1: Disallowance of expenses under section 14A

The Assessing Officer (AO) observed that the assessee company earned dividend income from its equity investments in M/s. Gillette India Ltd. The AO determined that although the assessee was engaged in establishing Gillette business in India, the investments only resulted in dividend income, not business income. Therefore, the AO disallowed expenses related to making and sustaining investments, resulting in a disallowance of &8377; 2,69,84,423. The Commissioner of Income-tax (Appeals) [CIT (A)] partly allowed the appeal, reducing the disallowance to &8377; 25,28,619. The Revenue challenged this decision before the Tribunal.

Issue 2: Application of formula for disallowance

The AO calculated the disallowance by considering the total loans and investments of the assessee, resulting in a ratio of 1:2.04. The disallowance was made based on this ratio and the expenses allocated to investments. The CIT (A) upheld this method, citing a similar approach in a previous year's case. The Tribunal found that no fresh investments were made during the assessment year and that the disallowance was computed following a formula approved in a previous case for AY 2005-06. The Tribunal concluded that no interference was necessary in the CIT (A)'s decision.

Issue 3: Disallowance of interest expenses

The Tribunal noted that the assessee earned dividend income from old investments without making new investments during the assessment year. The Tribunal referred to a case where it was argued that no interest expenditure was incurred for tax-free income investments due to surplus funds available. The Tribunal found that only actual expenses related to earning exempt income could be disallowed under section 14A. Consequently, the Tribunal upheld the CIT (A)'s decision to restrict the disallowance to &8377; 25,28,619, dismissing the Revenue's appeal.

In conclusion, the Tribunal affirmed the CIT (A)'s decision to reduce the disallowance of expenses under section 14A, based on the formula applied and the absence of new investments during the assessment year.