2019 (6) TMI 483 - HC - Income Tax

Court disallows Section 14-A expenses for non-strategic investments, emphasizes specific expenditure disallowance.

COMMISSIONER OF INCOME TAX Versus ALPHA G. CORP DEVELOPMENT LTD.

The court held that disallowance under Section 14-A of the Income Tax Act was warranted as the investments were not solely for strategic purposes. The ... Disallowance u/s 14-A - the underline investment was for strategic purposes - HELD THAT:- The Income Tax Appellate Tribunal (ITAT) rejected the Revenue’s appeal on the ground that income derived through strategic investments, i.e. for the purpose of maintaining minimum or what is deemed to be commercially feasible holding in a subsidiary entity, is exempt. This was based upon the previous understanding of the law. It was in these circumstances that this Court framed the question of law which it did. In Maxopp Investment Ltd. v. CIT [2018 (3) TMI 805 - SUPREME COURT] , the question – which this Court had formulated in these appeals, was answered. The answer to the question of law framed by this Court, therefore, has to be in the affirmative. It is apparent from a reading of the facts in the appeal that the CIT(A) formed an opinion based upon diverse reasoning, having regard to the facts of each case, regarding the nature of expenditure and especially whether it was a one-time investment opportunity availed of by the assessee. This is relevant in the context of assessee’s assertion that in fact no expenditure was incurred while investing in the mutual funds that yielded substantial income. As to whether in fact no expenditure was incurred or attributable at all, in these circumstances, it becomes a factual controversy requiring further hearing and scrutiny. On this aspect, therefore, the Court is of the opinion that the task is better performed by the ITAT. In view of the above discussion, the question of law is answered in favour of the Revenue, but subject to the factual findings recorded above. The matter is remitted to the ITAT for further hearing and findings on the substantive aspect with regard to attributability of expenditure to dividend income earned through the mutual funds in which the assessee invested. Issues:Whether the Income Tax Appellate Tribunal (ITAT) erred in holding that disallowance under Section 14-A of the Income Tax Act was not warranted due to strategic investment purposesRs.Analysis:During the Assessment Years (AYs) 2008-09, 2011-12, and 2012-13, the assessee earned tax-exempt income. The assessee argued that no expenditure was incurred on earning exempt income as the investments were made for township development purposes, awaiting statutory clearances. The Assessing Officer (AO) considered the explanation that investments were in subsidiary companies with substantial stakes, leading to exempt dividend income. However, the CIT (A) revealed that no dividends were earned, and only tax-exempt income was from mutual funds. The ITAT rejected the Revenue's appeal based on the understanding that income from strategic investments for maintaining minimum holding in a subsidiary entity is exempt.The Court referred to the Maxopp Investment Ltd. case, emphasizing that if expenditure is incurred to earn exempt dividend income, that specific expenditure must be disallowed under Section 14-A. The dominant purpose test for investments may not be relevant, and the principle of apportionment of expenses applies. The Court clarified that when shares are held as stock-in-trade, earning dividends becomes immaterial, focusing on profit generation through share trading. The Court answered the framed question in favor of the Revenue, but noted factual controversies regarding expenditure attributability to dividend income, remitting the matter to the ITAT for further scrutiny.In conclusion, the Court upheld the question of law in favor of the Revenue, subject to factual findings on expenditure attributability to dividend income. The appeals were partly allowed, with the matter remitted to the ITAT for detailed examination. All rights and contentions were kept open for further proceedings.