2016 (10) TMI 1014 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decision on Section 14A Disallowance, Emphasizes Actual Exempt Income Receipt

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance under section 14A. Emphasizing the need for actual ... Disallowance u/s 14A read with rule 8D - Held that:- We find that the case of the assessee is squarely covered by the decision of the various High Courts. The Hon’ble Delhi High Court in the case of Joint Investment Private Limited reported in [2015 (3) TMI 155 - DELHI HIGH COURT ] has held that section 14 of the Act or rule 8D cannot be interpreted so as to mean that the entire tax exempt income of the assessee is to be disallowed. That the window for disallowance is indicated in Section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount of tax exempt income. The Hon’ble Delhi High Court in the case of “M/s Cheminvest Ltd. vs. CIT” (2015 (9) TMI 238 - DELHI HIGH COURT) wherein also the assessee had made strategic investments in subsidiaries/Group Companies for retaining control over them but has not received any dividend income from such investments, has held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year and that the expression ‘does not form part of the total income’, in section 14A of the Act envisages that there should be an actual receipt of income which is not included in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income Thus we are of the view that no disallowance under section 14A is attracted in this case. - Decided in favour of assessee Issues:Disallowance under section 14A read with rule 8D of the Income Tax Rules.Analysis:1. Background and Disallowance by AO:During assessment, the AO found that the assessee had invested in equity shares of group companies worth &8377;18,09,33,700. The assessee claimed it was a strategic investment for controlling interest and no dividend income was earned. The AO disallowed &8377;1,93,69,565 under section 14A using rule 8D for expenditure related to tax-exempt income.2. Decision of CIT(A):The CIT(A) deleted the disallowance based on higher authorities' decisions, noting no exempt income was earned from the investments. The CIT(A) held that section 14A does not apply if no exempt income is received during the relevant year, emphasizing the need for actual receipt of income not forming part of total income.3. Judicial Precedents and Tribunal's Decision:The Tribunal noted decisions by various High Courts like Delhi, Punjab & Haryana, Allahabad, Gujarat, and Bombay, supporting the limited scope of disallowance under section 14A. The courts highlighted that only expenditure related to tax-exempt income should be disallowed, not the entire exempt income. The Tribunal found the case aligned with these precedents and upheld the CIT(A)'s decision, dismissing the Revenue's appeal.4. Conclusion:Considering the legal principles and precedents, the Tribunal concluded that no disallowance under section 14A applied in this case. The decision was based on the specific facts and in line with the interpretations of the relevant provisions by higher courts. Consequently, the appeal of the Revenue was dismissed, affirming the CIT(A)'s order.This comprehensive analysis of the judgment highlights the key legal arguments, decisions, and reasoning involved in the case regarding the disallowance under section 14A of the Income Tax Rules.