2017 (12) TMI 358 - AT - Income Tax

ITAT excludes subsidiary investments from disallowance under Section 14A

DCIT, Circle-2 (1), New Delhi Versus Alpha G. Corp Development Ltd.

The ITAT upheld the CIT(A)'s decision to exclude investments in subsidiary companies and mutual funds from the calculation of disallowance under Section ... Addition u/s 14A - Held that:- As no specific nexus has been established by the Assessing Officer about the receipt of the exempt income and incurring of expenses, hence, no disallowance of expenses is called for. - Decided in favour of assessee. Issues Involved:1. Exclusion of investments in subsidiary companies for calculating disallowance under Section 14A.2. Exclusion of investments in mutual funds generating exempt income for calculating disallowance under Section 14A.3. Reliance on the decision of the Hon'ble Delhi High Court in CIT Vs. Oriental Structural Engineering Pvt. Ltd.4. Commercial expediency and strategic investment considerations for disallowance under Section 14A.Detailed Analysis:1. Exclusion of Investments in Subsidiary Companies for Calculating Disallowance under Section 14A:The Revenue contended that the CIT(A) erred in directing the AO to exclude investments in subsidiary companies for the purpose of calculating disallowance under Section 14A. The assessee argued that these investments were made to circumvent the restrictions of the Haryana Urban Land Ceiling Act, 1975, and were for business and commercial expediency, not for earning dividends. The CIT(A) accepted the assessee's argument, noting that the investments were made to develop townships and malls, and the development rights were transferred to the holding company. The CIT(A) concluded that no disallowance under Section 14A was warranted as the investments were for strategic control and business purposes.2. Exclusion of Investments in Mutual Funds Generating Exempt Income for Calculating Disallowance under Section 14A:The Revenue argued that the CIT(A) erred in excluding investments in mutual funds generating exempt income. The assessee claimed that the investments in mutual funds were temporary until the funds received from foreign investors were utilized in projects. The CIT(A) noted that the assessee did not incur any financial or administrative expenses for these investments, as the funds were invested temporarily in mutual funds. The CIT(A) held that no disallowance under Section 14A was warranted, as the investments were not intended to earn dividends but were a temporary measure.3. Reliance on the Decision of the Hon'ble Delhi High Court in CIT Vs. Oriental Structural Engineering Pvt. Ltd.:The Revenue contended that the CIT(A) wrongly relied on the decision in CIT Vs. Oriental Structural Engineering Pvt. Ltd., arguing that the facts were different. The CIT(A) noted that in both cases, the investments were made for strategic control and business purposes. The CIT(A) cited various judicial pronouncements supporting the view that no disallowance under Section 14A is warranted when investments are made for strategic control and business expediency.4. Commercial Expediency and Strategic Investment Considerations for Disallowance under Section 14A:The CIT(A) found that the investments in subsidiary companies were made for business and commercial expediency to meet the minimum land requirements for developing townships under the Haryana Town and Country Planning Act. The CIT(A) concluded that these investments were for strategic control and business purposes, not for earning exempt income. The CIT(A) also noted that the assessee did not incur any direct or indirect expenses for these investments, and therefore, no disallowance under Section 14A was warranted.Conclusion:The ITAT upheld the CIT(A)'s decision to exclude investments in subsidiary companies and mutual funds from the calculation of disallowance under Section 14A. The ITAT found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeals for the assessment years 2008-09, 2011-12, and 2012-13. The ITAT agreed that the investments were made for strategic control and business purposes, and no disallowance under Section 14A was warranted.