2018 (4) TMI 520 - AT - Income Tax

Tribunal allows appeals, remands Section 14A issue for re-evaluation under Supreme Court guidelines

The Tribunal allowed both appeals filed by the assessee for statistical purposes. The issue of disallowance under Section 14A of the Income Tax Act was ... Disallowance u/s 14A - Held that:- What we find is that Authorised Representative of assessee had stated before the AO that the interest paid on the term loans debited in its P & L A/c was only towards investments made in acquiring shares of M/s.Shilpi Saranya Apparels and M/s.Home Linen Pvt Ltd. Be that as it may, the judgement of Hon’ble Apex Court in the case of M/s.Maxopp Investments Ltd. (2018 (3) TMI 805 - SUPREME COURT OF INDIA) was not available with the ld. Assessing Officer or with the Ld.CIT(A), when they were seized of the issue of disallowance u/s.14A of the Act. Thus the question regarding disallowance u/s.14A of the Act requires a re-visit by the ld. Assessing Officer. Set aside the orders of authorities below and remit the issue back to the file of AO for consideration afresh in accordance with law. - Decided in favour of assessee allowed for statistical purposes Issues Involved:Disallowance under Section 14A of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act, 1961:The core issue raised by the assessee pertains to the disallowance made by the Assessing Officer under Section 14A of the Income Tax Act, 1961, which was upheld by the Commissioner of Income-tax (Appeals). The disallowance amounts were Rs. 53,14,774 for the assessment year 2013-14 and Rs. 45,69,872 for the assessment year 2014-15.The assessee, a fashion designer and trader in garments, argued that substantial term loans were taken from Indian Overseas Bank to invest in shares of M/s. Shilpi Saranya Apparels and M/s. Home Linen Pvt Ltd. The assessee contended that these investments were part of a business strategy to further its business, not to earn dividends. Therefore, the disallowance under Section 14A should not apply to the interest paid on these term loans.Conversely, the Department's Representative (D.R) cited the Supreme Court's judgment in Maxopp Investments Ltd. vs. CIT, asserting that the purpose of investment in equity shares is irrelevant for the application of Section 14A. The D.R emphasized that Section 14A applies regardless of whether the shares were held as stock-in-trade or for gaining controlling interest.In rebuttal, the assessee's Authorized Representative (A.R) highlighted that the Supreme Court's ruling in Maxopp Investments Ltd. also mandates that the Assessing Officer must record satisfaction that the assessee's claim of expenditure related to exempt income is incorrect before making a disallowance under Section 14A. The A.R reiterated that the investments were made to further business interests and not for earning dividend income.2. Analysis of the Supreme Court Judgment in Maxopp Investments Ltd.:The Tribunal referred to the Supreme Court's judgment in Maxopp Investments Ltd., which clarified that:- Section 14A(1) disallows expenditure incurred in relation to income not forming part of the total income.- If the expenditure has no causal connection with exempted income, it should be allowed as business expenditure.- The dominant purpose of investment is irrelevant; what matters is whether the expenditure is related to earning dividend income.- The principle of apportionment of expenses between taxable and non-taxable income is embedded in Section 14A.The Supreme Court also noted that the Assessing Officer must record satisfaction regarding the correctness of the assessee's claim on expenditure related to exempt income before applying the theory of apportionment.3. Tribunal's Decision:The Tribunal observed that the judgment in Maxopp Investments Ltd. was not available to the Assessing Officer or the Commissioner of Income-tax (Appeals) when they addressed the disallowance issue. Given the Supreme Court's exposition, the Tribunal concluded that the disallowance under Section 14A requires re-examination by the Assessing Officer. Therefore, the Tribunal set aside the orders of the lower authorities and remitted the issue back to the Assessing Officer for fresh consideration in accordance with the law.Conclusion:In conclusion, both appeals filed by the assessee were allowed for statistical purposes, with the issue of disallowance under Section 14A remanded to the Assessing Officer for re-evaluation based on the Supreme Court's guidelines in Maxopp Investments Ltd.Order Pronouncement:The order was pronounced on 09th April, 2018, at Chennai.