2024 (2) TMI 217 - AT - Income Tax

Disallowance u/s 14A - second round of appeal - AO in second round who held that the assessee company was liable for disallowance u/s 14A r.w. Rule 8D for the reason mainly that the assessee has made investments in shares and investment in foreign subsidiary company - In the first round, the Tribunal decided the appeal of the Revenue against it. On appeal by the Revenue before the Hon ble Delhi High Court, the matter has been remitted back to the Tribunal for hearing and disposal afresh in the light of the directions of the Hon ble Delhi High Court. This is how, the matter is before the Tribunal once again - HELD THAT - It is an admitted position that the assessee has not incurred any interest expenditure, directly or indirectly for the earning of exempt income. The finding of the Ld. AO that for investing in mutual funds, the assessee must have incurred some expenditure is not based on facts. It is nothing but conjecture and surmise. No actual expenditure could be identified by the Ld. AO. Hon ble Supreme Court in Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT has held that the expression expenditure incurred in section 14A means actual expenditure and not to some imagined expenditure . If no expenditure is incurred in relation to the exempt income, no disallowance can be made. The decision (supra) of the Hon ble Supreme Court squarely applies to the facts of the assessee s case. In our humble opinion, the order of the Ld. CIT(A) is still maintainable de-hors his finding on strategic investment. We, therefore, hold that on the facts and in law as set out above, the Ld. CIT(A) was perfectly justified in deleting the impugned disallowance under section 14A r.w. Rule 8D. The remanded matter is disposed of accordingly. Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act for strategic investments.
2. Applicability of Rule 8D for calculating disallowance.
3. Satisfaction recording by the Assessing Officer (AO).
4. The nature of investments and their relevance to exempt income.

Summary:

Issue 1: Disallowance under Section 14A for Strategic Investments
The Tribunal initially ruled in favor of the assessee, but the High Court remanded the case to the ITAT to determine if disallowance under Section 14A was warranted for strategic investments. The High Court emphasized the need for factual scrutiny to ascertain if any expenditure was incurred for earning exempt income.

Issue 2: Applicability of Rule 8D
The AO disallowed Rs. 1,63,50,876/- under Section 14A r.w. Rule 8D, arguing that the assessee must have incurred some expenditure for investing in shares and mutual funds. The assessee contended that no actual expenditure was incurred as the investments were made using its own equity and through an amalgamation.

Issue 3: Satisfaction Recording by AO
The CIT(A) deleted the disallowance, stating that the AO did not record satisfaction under Rule 14A(2) about the correctness of the assessee's claim of not incurring any expenditure. Both the assessee and AO concurred that no interest expenditure was incurred for earning exempt income.

Issue 4: Nature of Investments and Exempt Income
The CIT(A) noted that the investments were made for control purposes and were strategic, thus not warranting disallowance under Section 14A. The Tribunal upheld this view, emphasizing that the AO's finding was based on conjecture and not on actual expenditure. The Supreme Court's decision in Maxopp Investment Ltd. vs. CIT was cited, which held that "expenditure incurred" means actual expenditure and not imagined expenditure.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance under Section 14A r.w. Rule 8D. The Tribunal concluded that no actual expenditure was incurred by the assessee for earning exempt income, and thus, no disallowance was justified. The remanded matter was disposed of accordingly.