2019 (11) TMI 206 - AT - Income Tax

Disallowance u/s 14A - book profits for the purpose of computing the taxable liability under Section 115JB - HELD THAT - CIT(A) is correct to the extent of directing the A.O. to exclude the investments in foreign entities and investment in shares and mutual funds which had not earned exempt income and restricting the amount of disallowance under Section 14A of the Act to the extent of exempt income. The decision of the CIT(A) is based on the ratio of the judgment of jurisdictional High Court in the case of Redington (India) Ltd. v. Addl. CIT 2017 (1) TMI 318 - MADRAS HIGH COURT . The Special Bench of ITAT, Delhi in Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI held that the only investments which yielded exempt income alone had to be considered for the purpose of computing the amount of disallowance under Section 14A of the Act. However, the direction of the CIT(A) to A.O. to exclude the investment in subsidiary companies cannot be upheld in view of the law laid down by Hon'ble Supreme Court in Maxopp Investment Ltd. v. CIT 2018 (3) TMI 805 - SUPREME COURT wherein it was laid down that the strategic investments cannot be excluded from the purview of the provisions of Section 14A of the Act. Therefore, the direction of the CIT(A) stands modified to this extent. Disallowance under Section 14A not be added back to the book profit for the purpose of computing taxable income under Section 115JB - CIT(A) cannot be faulted with as he followed the decision of Special Bench of this Tribunal in the case of Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI No contrary decision was cited before us. Hence, we confirm the decision of the CIT(A). Both the appeals filed by the Revenue are partly allowed for statistical purposes. Addition u/s 14A - assessee contended that the provisions of Section 14A of the Act are not applicable since the investments were made only in subsidiary companies for strategic purposes - HELD THAT - The contention of the assessee was overruled by the Hon'ble Supreme Court in Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT Hence, we confirm the order of the CIT(A).

Summary

Issues:
Cross appeals by Revenue and Assessee against common order of CIT(A) for assessment years 2013-14 and 2014-15.

Analysis:

Issue 1: Disallowance under Section 14A of the Income-tax Act, 1961

The assessee, engaged in investments, filed a return of loss for 2013-14, later revised to show income. The Assessing Officer made disallowances under Section 14A and added amounts to long-term capital gains. The CIT(A) directed the AO to recompute disallowances under Rule 8D, excluding certain investments and limiting disallowances to exempt income. The CIT(A) also ordered deletion of disallowances from book profits under Section 115JB. The Revenue challenged these directions, arguing against exclusions and deletions.

Issue 2: Revenue's Appeals

The Revenue raised multiple grounds challenging the CIT(A)'s directions on disallowances under Section 14A. They contested exclusion of certain investments, arguing against the CIT(A)'s interpretation of the law. The Revenue also objected to the deletion of disallowances from book profits under Section 115JB. The ITAT partially allowed the Revenue's appeals, modifying the CIT(A)'s directions on exclusions but upholding the deletion from book profits based on the Special Bench decision.

Issue 3: Assessee's Appeals

The Assessee challenged the disallowances made under Section 14A, arguing that investments were strategic and not for earning dividend income. They contended that the disallowance already made was reasonable and that the AO did not justify further disallowances under Rule 8D. However, the ITAT confirmed the disallowances, citing the Supreme Court's ruling on similar cases.

Conclusion:

The ITAT partially allowed the Revenue's appeals, modifying the CIT(A)'s directions on exclusions under Section 14A. The Assessee's appeals were dismissed, upholding the disallowances made. The order was pronounced on 31st October 2019 in Chennai, with the ITAT confirming the decisions based on legal precedents and interpretations of the Income-tax Act, 1961.