2014 (4) TMI 752 - AT - Income Tax

Section 14A Disallowance Set Aside for Strategic Investments with No Expenditure to Earn Exempt Income

The ITAT Mumbai held that the AO's disallowance under section 14A was unjustified as the assessee's investments, primarily in subsidiaries and joint ... Disallowance u/s 14A of the Act – Requirement for the AO to Record Satisfaction - Applicability of Rule 8D of the Rules - Dividend income earned – Held that:- The assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same – the investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. The department has not disputed the fact that out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration – Prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies – Relying upon GODREJ AND BOYCE MFG. CO. LTD. [2010 (8) TMI 77 - BOMBAY HIGH COURT] - The assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies – thus, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified and is liable to be set aside – Decided in favour of Assessee. Issues Involved:1. Applicability of Rule 8D for disallowance under Section 14A of the Income Tax Act.2. Requirement for the Assessing Officer (AO) to record satisfaction regarding the correctness of the assessee's claim.3. Consideration of strategic investments and related expenditure.Detailed Analysis:1. Applicability of Rule 8D for Disallowance under Section 14A:The primary issue revolves around the applicability of Rule 8D for the disallowance under Section 14A concerning the exempt dividend income earned by the assessee. The assessee had disallowed a sum of Rs. 1,40,000/- under Section 14A, but the AO applied Rule 8D, resulting in a disallowance of Rs. 7,61,37,727/-. The Tribunal noted that Rule 8D is applicable for the assessment year (A.Y.) 2009-10, as established in the previous year's ruling (A.Y. 2008-09). The Tribunal upheld the mandatory application of Rule 8D for calculating disallowance under Section 14A for the A.Y. 2008-09 and onwards.2. Requirement for the AO to Record Satisfaction:The assessee contended that the AO must record satisfaction regarding the correctness of the claim made by the assessee before invoking Rule 8D. This principle is supported by the Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT (328 ITR 81), which mandates that the AO must be satisfied with the accounts of the assessee before applying Rule 8D. The Tribunal emphasized that the satisfaction of the AO must be based on an objective basis, and only if the AO is not satisfied with the assessee's claim, should Rule 8D be applied.3. Consideration of Strategic Investments and Related Expenditure:The assessee argued that a significant portion of its investments (97.82%) were strategic investments in unlisted subsidiary and joint venture companies, which are long-term and do not require expenditure for maintaining the portfolio. The Tribunal found merit in this argument, noting that the primary purpose of these investments was for control and business purposes, not for earning dividend income. The Tribunal referenced several decisions, including Garware Wall Ropes Limited Vs. Addl. CIT and Oriental Structural Engineers (P) Ltd. Vs. ACIT, which supported the view that no disallowance under Section 14A should be made if no expenditure is incurred for earning exempt income.Conclusion:The Tribunal concluded that the AO did not bring any contrary facts or material to show that the assessee incurred any expenditure for maintaining the investments. The Tribunal held that the assessee successfully demonstrated that no expenditure was incurred for the strategic investments in subsidiary companies. Consequently, the disallowance made by the AO was not justified and was deleted. The appeal of the assessee was allowed.Order Pronouncement:The order was pronounced in the open Court on 26/03/2014.