2017 (5) TMI 209 - AT - Income Tax

Tribunal directs deletion of disallowance under Section 14A; ground under Section 36(1)(iii) dismissed.

The Tribunal partly allowed the appeal, directing the deletion of the disallowance under section 14A read with Rule 8D as the assessee did not earn any ... Disallowance under section 14A r.w. Rule 8D - Held that:- No disallowance under section 14A of the Act can be made in the case on hand for the year under consideration since the assessee has not earned any exempt income. We, therefore, set aside the decision of the authorities below and direct the AO to delete the disallowance of expenditure under section 14A of the Act. See Cheminvest Limited Versus Commissioner of Income Tax-VI [2015 (9) TMI 238 - DELHI HIGH COURT] Whether investments have been made in the subsidiary company for the purposes of having strategic control therein and not for the purposes of earning of exempt income ? - Held that:- Entire strategic investments made by the assessee in the shares of its subsidiary company, M/s. Shreeniwas Cotton Mills Ltd. is to be excluded while computing the disallowance under section 14A r.w. Rule 8D. See Vakrangee Ltd. vs. ACIT [2016 (8) TMI 1148 - ITAT MUMBAI] Issues Involved:1. Disallowance under section 14A read with Rule 8D.2. Disallowance of interest on loan advance under section 36(1)(iii).Detailed Analysis:1. Disallowance under section 14A read with Rule 8D:The primary issue revolves around the disallowance of Rs. 3,67,730/- under section 14A of the Income Tax Act, 1961, read with Rule 8D. The assessee contended that no expenditure was incurred for earning exempt income, and no exempt income was earned during the assessment year. The assessee relied on several judicial pronouncements, including Cheminvest Ltd. vs. CIT (378 ITR 33 (Del.)), Garware Wall Ropes Ltd. vs. Add. CIT (ITA No. 5408/Mum/2012), and Vakrangee Ltd. vs. ACIT (ITA No. 6988/Mum/2014 dated 10.08.2016), which support the view that no disallowance can be made under section 14A if no exempt income is earned.The Revenue, however, argued that as per CBDT Circular No. 5/2014 dated 11.02.2014, disallowance under section 14A can be made irrespective of whether any exempt income was earned during the year. The Revenue also referred to the Supreme Court judgment in Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 155 ITR 120/22 Taxman 49 (SC), emphasizing that it is the income and not the receipt that should be considered.The Tribunal observed that the assessee did not earn any exempt income during the year, as recorded by both the AO and CIT(A). Citing the Delhi High Court’s decision in Cheminvest Ltd., which held that no disallowance under section 14A can be made if no exempt income is earned, and the Bombay High Court’s decision in Pr. CIT vs. M/s. Ballarpur Industries Ltd., the Tribunal concluded that no disallowance under section 14A is warranted. Consequently, the Tribunal directed the AO to delete the disallowance of Rs. 3,67,730/-.Additionally, the assessee argued that the investments were strategic investments in its subsidiary for control purposes and not for earning exempt income. The Tribunal, referencing its previous decisions in Vakrangee Ltd. and Fiduciary Euromax Global Markets Ltd., held that strategic investments should be excluded while computing disallowance under section 14A read with Rule 8D. Therefore, the Tribunal directed the exclusion of strategic investments in the assessee's subsidiary while computing the disallowance.2. Disallowance of interest on loan advance under section 36(1)(iii):The second issue pertained to the disallowance of Rs. 4,81,328/- under section 36(1)(iii) of the Income Tax Act. The assessee did not press this ground during the appeal, rendering it infructuous. Consequently, the Tribunal dismissed this ground as not pressed.Conclusion:The Tribunal partly allowed the appeal, directing the deletion of the disallowance under section 14A read with Rule 8D and dismissing the ground related to the disallowance under section 36(1)(iii) as not pressed. The order was pronounced in the open court on 3rd May 2017.