2017 (5) TMI 579 - AT - Income Tax

Tribunal rules in favor of taxpayers in disallowance cases under Section 14A

M/s. Karvy Stock Broking Limited Versus Dy. Commissioner of Income Tax And M/s. Karvy Reality (India) Limited, Hyderabad Versus Dy. Commissioner of Income Tax

In ITA No.1397/Hyd/2016 - A.Y 2011-12, the Tribunal directed the AO to delete the disallowance under Section 14A as no exempt income was earned, following ... Disallowance u/s 14A - Held that:- The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. See Redington (India) Ltd vs. ACIT [2017 (1) TMI 318 - MADRAS HIGH COURT] MOU entered into by the assessee with M/s. Sri Sai Ram Projects Ltd is placed on record. On perusal thereof, it is seen that by virtue of the investment in shares, the assessee has acquired interest in the company for getting a right over the property at concessional rates. Therefore, it is more of business investment and not an investment per se for earning of dividend income. It is also submitted by the learned Counsel for the assessee that in the subsequent year, the property acquired under the MOU has been sold and the income therefrom has been offered as business income. However, the relevant documents in support of these contentions are not filed before us. Even otherwise, the assessee has not earned dividend income under the relevant A.Y. The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department Issues Involved:1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D.2. Applicability of Section 14A when no exempt income is earned.3. Commercial expediency as a defense against disallowance under Section 14A.Detailed Analysis:ITA No.1397/Hyd/2016 – A.Y 2011-121. Disallowance under Section 14A:The assessee was aggrieved by the CIT(A)-9 Hyderabad's order confirming the disallowance made by the AO under Section 14A of the Act. The AO observed that the assessee had made investments in equity shares of subsidiary and associated companies without earning any dividend income for the year. Based on CBDT Circular No.5/2014, the AO made a disallowance of Rs. 84,18,282, which the CIT(A) upheld.2. Applicability of Section 14A when no exempt income is earned:The assessee contended that the investments were made for business purposes as a commercial expediency and not for earning dividend income, citing the Supreme Court's decision in SA Builders Ltd. The assessee argued that since no exempt income was earned, Section 14A should not apply. The learned Counsel for the assessee supported this with the Madras High Court's decision in Redington (India) Ltd vs. ACIT.3. Commercial Expediency:The assessee argued that investments in subsidiaries were for business purposes and not for earning exempt income. The learned DR countered that the provisions of Section 14A apply regardless of the purpose of the investment if no exempt income is earned.4. Tribunal's Decision:The Tribunal found that Section 14A applies to expenditure incurred for earning exempt income, but only if exempt income is actually earned during the relevant financial year. The Tribunal noted that the assessee had not earned any exempt income during the financial year and relied on the Madras High Court's decision in Redington (India) Ltd, which held that Section 14A read with Rule 8D cannot apply in the absence of exempt income. Consequently, the Tribunal directed the AO to delete the disallowance made under Section 14A, allowing the assessee’s appeal on this ground.ITA No.1398/Hyd/2016 – A.Y 2009-101. Disallowance under Section 14A:The assessee, engaged in realty services, was aggrieved by the CIT(A)-2 Hyderabad's order confirming the disallowance of Rs. 84,66,354 under Section 14A read with Rule 8D. The AO observed that the assessee had made significant investments in the share capital of M/s. Sri Sai Ram Projects Ltd using interest-bearing funds.2. Commercial Expediency:The assessee argued that the investment was made for commercial benefits, such as purchasing plots at concessional rates, and not for earning dividend income. The AO, however, was not convinced, noting that the benefit was taxable as business income and did not preclude disallowance under Section 14A. The CIT(A) upheld the AO's decision.3. Tribunal's Decision:The Tribunal examined the MOU between the assessee and M/s. Sri Sai Ram Projects Ltd, noting that the investment was more of a business investment rather than for earning dividend income. The Tribunal also noted that the assessee had not earned any exempt income during the relevant year. Relying on the Madras High Court's decision in Redington (India) Ltd, the Tribunal held that the expenditure was not disallowable under Section 14A read with Rule 8D in the absence of exempt income, allowing the assessee’s appeal.Conclusion:- A.Y 2011-12: The assessee’s appeal was partly allowed, with the Tribunal directing the AO to delete the disallowance made under Section 14A.- A.Y 2009-10: The assessee’s appeal was allowed, with the Tribunal holding that the expenditure was not disallowable under Section 14A read with Rule 8D due to the absence of exempt income.Order Pronounced:The order was pronounced in the Open Court on 9th May, 2017.