2018 (3) TMI 466 - AT - Income Tax

ITAT upholds CIT(A) decision on Section 14A disallowance, rejects Revenue's appeal (A)

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance under Section 14A read with Rule 8D. The ITAT ... Disallowance u/s 14A - Held that:- Taking into consideration, the strategic investment, debt oriented general funds (dividend), debt oriented mutual fund (growth option), debt oriented mutual fund, debt oriented fund dividend loan , an amount of ₹ 10,49,770/- disallowed by the assessee on the amount of interest. The AO’s action of deriving satisfaction was thus without any cogent grounds, the AO does not derive any power from section 14A(2) in the absence of any cogent grounds to arrive at a finding that the appellant’s claim of disallowance was not on sound grounds as the investments of more than 90% of the investments are either taxable or strategic investment. Hence, no further disallowance is required to be made by the AO. - Decided against revenue Issues Involved:1. Deletion of disallowance made under Section 14A read with Rule 8D of the Income Tax Act, 1961.Issue-wise Detailed Analysis:Disallowance under Section 14A:1. Facts of the Case:The assessee company, engaged in consultancy, online data retrieval services, corporate insurance agency, and software development, earned tax-free income and made investments amounting to Rs. 1,12,62,25,693/-. The company paid interest of Rs. 4,85,07,256/-. The Assessing Officer (AO) found the assessee's estimation of exempt income and related expenditure unsatisfactory and applied Rule 8D of the Income Tax Rules, 1962, disallowing Rs. 2,76,36,280/- under Section 14A of the Income Tax Act, 1961.2. CIT(A) Decision:The CIT(A) deleted the addition, referencing the case of CIT-I Ludhiana v Abhishek Industries [2015] (2) TM-1, 672 (P&H), ITA No.320 of 2013 dated 27.01.2015, where it was held that the AO must record satisfaction based on credible evidence that interest-bearing funds were used to earn tax-free income.3. Revenue's Appeal to ITAT:The Revenue appealed, arguing that the AO's computation indicated implicit satisfaction as required under Section 14A(2). The Revenue relied on several judicial decisions, including:- Indiabulls Financial Services Ltd. vs. DCIT [2016] 76 taxmann.com 268 (Delhi)- Godrej & Boyce Manufacturing Company Ltd. vs. DCIT [2017] 81 taxmann.com 11 (SC)- Punjab Tractors Ltd. vs. CIT [2017-TIOL-353-P&H-IT]4. Assessee's Argument:The assessee argued that:- Investments were made in strategic advisory, N-Sure, and windmill divisions.- No loans were taken in the N-Sure Division, and no inter-division loans existed.- Investments in equity-oriented mutual funds required minimal managerial work.- Strategic investments in unlisted shares of subsidiaries and associates should not be disallowed.The assessee cited several judicial precedents to support their claim, including:- CIT-I Ludhiana v Abhishek Industries [2015] 380 ITR 652 (P&H)- CIT vs. Deepak Mittal 361 ITR 131 (P&H)- ACIT v Bharat Hotels Ltd, ITAT Delhi, ITA No 4959/Del/2012- DCIT v Inter Globe Enterprises, ITA No. 1362 & 1032/Del/2013- Joint Investments (P) Ltd. vs. CIT (ITA No 117/2015) (Delhi High Court)5. ITAT's Decision:The ITAT considered the strategic nature of investments, the types of mutual funds, and the judicial precedents cited. It concluded that the AO's satisfaction was not based on cogent grounds, and more than 90% of the investments were either taxable or strategic. Thus, the disallowance of Rs. 10,49,770/- by the assessee was deemed sufficient, and no further disallowance was required.Conclusion:The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance under Section 14A read with Rule 8D. The order was pronounced in the open court on 13th February 2017.