2014 (11) TMI 982 - AT - Income Tax

Exclusion of SPV Investments from Disallowance Calculation under Section 14A

M/s. L&T Infrastructure Development Projects Ltd. Versus Income Tax Officer, Company Ward- II (1), Chennai

The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to exclude investments in special purpose vehicles (SPVs) from ... Disallowance under section 14A - whether CIT(A) has failed to appreciate that investments in subsidiaries are out of commercial expediency and hence should not be considered for disallowance under section 14A - Held that:- Respectfully following the said decision of Asst. CIT v. Oriental Structural Engineers P. Ltd. [2011 (12) TMI 6 - ITAT DELHI] wherein held that no expenses and interest attributable to the investments made by the assessee in SPVs can be disallowed under section 14A read with rule 8D because it cannot be termed as expense/interest incurred for earning exempt income, we direct the Assessing Officer to recompute the disallowance under section 14A by excluding the investments made in special purpose vehicles and consider only the balance investments for the purpose of disallowance under section 14A of the Act. The Assessing Officer shall calculate disallowance under section 14A the interest expenses directly incurred for earning exempt income on the investments other than the investments made in special purpose vehicles plus 2 per cent. of the dividend income earned on the investments other than investments made in special purpose vehicles after verifying the total investments made by the assessee and after providing adequate opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes. Issues Involved:- Disallowance under section 14A of the Income Tax Act for investments in subsidiaries based on commercial expediency.- Application of rule 8D for disallowance and scope of enhancement by the Commissioner of Income-tax (Appeals).Analysis:1. The appeal was filed against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2007-08, challenging the disallowance under section 14A of the Act. The assessee contended that investments in subsidiaries were made out of commercial expediency and should not be considered for disallowance under section 14A. The Assessing Officer disallowed certain amounts under section 14A and rule 8D, which the Commissioner of Income-tax (Appeals) partly upheld. The Commissioner directed the Assessing Officer to apportion interest and administrative expenses based on investments made. The assessee argued that investments in subsidiaries were for specific projects and not for earning dividend income, citing a similar Tribunal decision. The Departmental representative supported the disallowances made by the lower authorities.2. The Tribunal reviewed the orders of the lower authorities and the decision relied upon by the assessee. It was noted that the Tribunal in a similar case held that expenses and interest attributable to investments in special purpose vehicles (SPVs) cannot be disallowed under section 14A. The Tribunal emphasized that investments in SPVs were for commercial expediency and not for earning exempt income. The Tribunal directed the Assessing Officer to recompute the disallowance under section 14A by excluding investments made in SPVs and considering only the balance investments for disallowance purposes. The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) in excluding investments in SPVs from disallowance and calculating disallowance based on the remaining investments.3. The Tribunal's decision aligned with the principle that expenses and interest related to investments made for commercial expediency, such as forming SPVs for specific projects, should not be disallowed under section 14A. The Tribunal emphasized the importance of considering the purpose of investments and upheld the exclusion of investments in SPVs from the disallowance calculation. The Tribunal directed the Assessing Officer to recalculate the disallowance by excluding SPV investments and considering only the remaining investments for disallowance under section 14A. Ultimately, the appeal of the assessee was allowed for statistical purposes.This detailed analysis highlights the key arguments, decisions, and reasoning presented in the judgment regarding the disallowance under section 14A of the Income Tax Act for investments in subsidiaries based on commercial expediency and the application of rule 8D for disallowance.