2017 (9) TMI 1583 - AT - Income Tax

Tribunal allows appeal, deletes disallowance under Section 14A due to lack of fresh investments

The Tribunal allowed the appeal, deleting the disallowance of Rs. 25,68,356/- under Section 14A. The Tribunal found no fresh investments were made during ... Disallowance u/s 14A - no expenditure was incurred to earn exempt income - Held that:- The appellant has not made any fresh investment during the year. He has received interest only on the investments made in earlier years. The appellant is engaged in the banking business activities. The investments held by the banking concerns are treated as a part of its business income. Therefore, income arising from such investments is treated as part of business income falling under the head profit and gains of business. The appellant contended that no expenditure was incurred for earning above exempt income which does not form part of the total income. The Assessing Officer has disallowed total exempted interest earned without any basis. It is undisputed fact that the assessee company has earned tax exempt income. The provisions of section 14A states that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act. The AO has not given any finding as to how the claim of the assessee bank that no expenditure was incurred to earn exempt income was incorrect. Furthermore, it is undisputed fact that exempt income is earned from securities, which were invested in the earlier years. No any fresh investments have been made. - Decided in favour of assessee. Issues Involved:1. Legality of the CIT(A)'s order.2. Disallowance of expenses under Section 14A to earn tax-free income.3. Provision of opportunity to the appellant before making the disallowance.4. Deduction under Section 36(1)(viia).Detailed Analysis:1. Legality of the CIT(A)'s Order:The appellant challenged the order dated 13.08.2015 passed by the CIT(A)-20, New Delhi, arguing that it is 'bad both in the eyes of law and on facts.' The appellant contended that the CIT(A) erred in confirming the Assessing Officer's (AO) decision, which rejected the appellant's claim that investments in tax-free securities were made from interest-free capital/funds, and that the assessment lacked a live nexus between the expenditure incurred and the tax-free income.2. Disallowance of Expenses under Section 14A:The AO disallowed Rs. 25,68,356/- under Section 14A, assuming that some expenditure must have been incurred to earn the tax-free interest income from investments in tax-free bonds. The appellant argued that no expenditure was incurred for earning the tax-free income and that the investments were made from their own interest-free funds. The AO's disallowance was based on the presumption that the appellant's banking activities, which include investment of funds, inherently involve some expenditure.The appellant cited several case laws to support their contention, including:- Delhi Towers Ltd. v. DCIT (2017): No fresh investments were made during the year, and tax-free dividend income was earned from old investments.- Maxopp Investments Ltd. v. CIT (2011): The AO must record reasons for not being satisfied with the assessee's claim of no expenditure incurred for earning exempt income.- Minda Capital Ltd. vs. DCIT (2015): The AO must examine the assessee's claim and record satisfaction before making disallowance under Rule 8D.- CIT v. Oriental Structural Engineers (P) Ltd. (2013): Expenditure not directly connected with exempt income cannot be disallowed.3. Provision of Opportunity to the Appellant:The appellant argued that no opportunity was provided before making the disallowance. The AO did not verify the correctness of the appellant's claim and did not record any satisfaction about the claim of no expenditure incurred for earning exempt income. The AO's disallowance was arbitrary and lacked cogent reasons, as required by law.4. Deduction under Section 36(1)(viia):The appellant also contended that the AO, based on hypothetical assumptions, assessed the income on the enhanced income against the returned income and alternatively did not allow the deduction of 7.5% on the enhanced assessed income under Section 36(1)(viia). The deduction should be allowed based on the returned taxable income.Conclusion:The Tribunal found merit in the appellant's arguments. It was observed that no fresh investments were made during the year, and the interest was earned from investments made in earlier years. The AO did not provide any basis for disallowing the total exempted interest earned. The Tribunal noted that the AO failed to record any satisfaction regarding the correctness of the claim that no expenditure was incurred to earn the exempt income. The case laws cited by the appellant were found to be applicable, leading to the conclusion that the appeal deserved to be allowed.Judgment:The appeal was allowed, and the disallowance of Rs. 25,68,356/- under Section 14A was deleted. The order was pronounced in the open court on 18.09.2017.