2024 (12) TMI 1676 - AT - Income Tax

Exempt dividend from investment shares: s.14A/Rule 8D expense disallowance upheld; strategic travel costs included, interest excluded, other items deleted.

Disallowance under s.14A r.w. Rule 8D was held mandatory where exempt dividend arose from shares held as investments, and the 'dominant purpose' of ... Disallowance u/s 14A - exempt income was earned from shares held as 'trading assets' or 'stock in trade' - HELD THAT:- Dominant intention is not important for the purposes of computing disallowance u/s 14A. As the assessee has acquired the shares in the group companies and has held it as investment, whatever may be the dominant purpose, disallowance u/s 14A r.w.Rule 8D is mandatory, if the assessee earns dividend from such investments. Respectfully following the view expressed in case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] we hold that the dominant purpose for making investment in shares is not important criteria, even though the assessee has acquired shares for having controlling interest in the group companies. Items considered by the authorities for computing the disallowance as per Rule 8D(2) - AO has analyzed various expenditures incurred by the assessee and has observed that the suo-moto disallowance made by the assessee is not correct -The assessee has been persistent on its submission that Rs. 1,02,63,993/- was incurred only for acquiring controlling interest and that there is no other purpose made out by the assessee for incurring these expenses. The expenses include items like, rent paid while staying in UK and other expenses like electricity, postage and telephone, vehicle expenses, kitchen expenses and maintenance expenses etc. It is submitted that the assessee used to undertake foreign travel to discuss and decide on strategic investments. As these expenses have been incurred towards planning of strategic investments in lieu of which the assessee has earned dividend, the amount to be considered as a part of direct expenses under rule 8D (2)(i). There is nothing on record placed by the assessee in order to consider that these expenditures would have been incurred for any other purposes other than planning for strategic investments. Disallowance u/s 8D(2)(i) as direct expenses - AO disallowed interest expenses. In our view interest component cannot be considered for disallowance under Rule 8D(2)(i). Accordingly we direct the same to be deleted from Rule 8(D)(2)(i). Disallowance under Rule 8D(2)(i) - Foundation has offered the money received from the assessee to taxation. Also that these are incurred for rendering professional services to Spicer India Ltd., and not for acquiring controlling interest. It is noted that Spicer India Ltd for the year under consideration has been allowed the amount paid to the assessee as business expenditure. Though this is related party transaction, there is no loss to the revenue. Further it is not the case of the revenue that the expenditure incurred by the assessee are unreasonable and excessive. Accordingly, we direct this disallowance to be deleted under Rule 8D(2)(i). Disallowance of depreciation - It is in the nature of allowance and not an expenditure incurred by the assessee. In our view, this in any manner cannot be considered for computing disallowance under Rule 8D. We direct to exclusion of depreciation from the computation under Rule 8D(2)(i). Disallowance computed under Rule 8D(2)(ii) - We are of the opinion that from the computation placed, proportionate disallowance was made, as the assessee was maintaining mixed source of funds. No further disallowance is called for under Rule 8D(ii). We place reliance on the decision of Reliance Utilities & Power Ltd. [2019 (1) TMI 757 - SUPREME COURT] in support of the same. Accordingly, the Ld.AO is directed to delete the disallowance computed by the Ld.AO under Rule 8D(2)(ii). Disallowance under Rule 8D (2)(iii) - AR submitted that the disallowance may be restricted only to those investments that has yielded exempt income for the year under consideration - We direct the Ld.AO to consider only those investments that has yielded exempt income for the year under consideration for purpose of computing disallowance under Rule 8(D)(2)(iii). Accordingly we direct the assessee to furnish details of the investments that has yielded the exempt income during the year under consideration. 1. ISSUES PRESENTED AND CONSIDERED 1) Whether acquisition and holding of shares in group companies for the purpose of retaining controlling interest constitutes 'business activity', so as to negate application of section 14A on the premise of dominant purpose. 2) Whether section 14A read with Rule 8D applies where shares are held as investments for controlling interest and exempt dividend is earned, irrespective of dominant intention. 3) Under Rule 8D(2)(i), which of the impugned expenses were correctly treated as 'direct expenditure' incurred in relation to exempt dividend income. 4) Whether interest expenditure can be treated as 'direct expenditure' under Rule 8D(2)(i), and whether any further disallowance under Rule 8D(2)(ii) was warranted when the assessee had already made a proportionate suo motu disallowance. 5) Whether depreciation can be included in disallowance as 'expenditure' under Rule 8D. 6) Under Rule 8D(2)(iii), whether the 0.5% computation should be confined only to investments that actually yielded exempt income during the year. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Characterisation of shareholding for 'controlling interest' and applicability of section 14A/Rule 8D despite dominant purpose Legal framework (as discussed by the Court): The Court applied section 14A read with Rule 8D and relied upon the principle that disallowance is founded on apportionment between taxable and non-taxable income, and that dominant intention is not determinative where exempt dividend income arises from investments. Interpretation and reasoning: The Court treated it as admitted that the assessee was not trading in shares and that shares of group companies were shown as 'investments', acquired to maintain controlling interest. The assessee's plea that such activity constituted an 'integral business' and that dominant intention was not to earn dividend was rejected for section 14A purposes. The Court held that, in view of the binding reasoning it applied from the Supreme Court decision discussed in the judgment (Maxopp), the dominant purpose of investment (control vs dividend) does not govern section 14A; once exempt dividend is earned from investments, disallowance under section 14A read with Rule 8D follows. Conclusion: The Court upheld the application of section 14A/Rule 8D to dividend earned from investments held for controlling interest and dismissed the ground that controlling interest is a 'business activity' sufficient to avoid section 14A on dominant-purpose theory. Issue 3: Identification of 'direct expenditure' under Rule 8D(2)(i) Legal framework (as discussed by the Court): The Court noted that 'expenditure' for section 14A includes direct and indirect forms (managerial, administrative, financial, etc.) so long as it has a connection with earning exempt income, and that Rule 8D prescribes the computation method once section 14A applies. Interpretation and reasoning: The Court examined the nature of the UK-related expenditure (rent and allied expenses such as electricity, telephone/postage, vehicle, kitchen, maintenance) and accepted the assessee's own consistent position that these were incurred for planning/undertaking strategic investments for controlling interest. Since the exempt dividend arose from such strategic investments and there was nothing on record showing an alternative business purpose for these UK expenses, the Court treated them as directly relatable to exempt income for Rule 8D(2)(i). Conclusion: Disallowance of UK transit/guest house expenses of Rs. 1,02,63,993/- was upheld as direct expenditure under Rule 8D(2)(i). Issue 4: Treatment of interest and professional fees; scope of Rule 8D(2)(i) vs Rule 8D(2)(ii) Legal framework (as discussed by the Court): The Court applied the structure of Rule 8D(2) and distinguished between direct expenditure under clause (i) and interest apportionment under clause (ii). It also applied the mixed-funds principle as relied upon in the judgment, treating proportionate disallowance by the assessee as sufficient on the facts. Interpretation and reasoning (interest): The Court held that interest should not be included as 'direct expenditure' under Rule 8D(2)(i). Further, on Rule 8D(2)(ii), the Court noted that the assessee had already made a substantial proportionate suo motu disallowance out of total interest, based on mixed sources of funds, and therefore 'no further disallowance' was called for under Rule 8D(2)(ii). The disallowance additionally computed by the assessing authority under Rule 8D(2)(ii) was directed to be deleted. Interpretation and reasoning (professional fees): The Court examined the professional fee disallowance relating to payment routed through a foundation, and accepted that (i) the recipient offered the amount to tax, (ii) the payments were incurred for rendering professional/management services to a group company from which taxable professional receipts were earned by the assessee, and (iii) it was not the revenue's case that the expenditure was excessive or unreasonable. On these findings, the Court directed deletion of this disallowance from Rule 8D(2)(i) computation. Conclusion: (a) Interest component was directed to be excluded from Rule 8D(2)(i) and the additional disallowance made under Rule 8D(2)(ii) was directed to be deleted. (b) Disallowance of professional fees of Rs. 1.60 crore was directed to be deleted from Rule 8D(2)(i) treatment. Issue 5: Inclusion of depreciation in Rule 8D computation Legal framework (as discussed by the Court): The Court treated depreciation as an allowance rather than 'expenditure incurred'. Interpretation and reasoning: The Court held that depreciation is not an expenditure actually incurred and therefore cannot be considered for computing disallowance under Rule 8D. Conclusion: Depreciation was directed to be excluded from Rule 8D(2)(i) computation. Issue 6: Scope of Rule 8D(2)(iii) - investments to be considered Legal framework (as discussed by the Court): The Court accepted the proposition that for Rule 8D(2)(iii), only investments yielding exempt income during the relevant year should be considered, and directed a recomputation on that basis. Interpretation and reasoning: The Court directed the assessing authority to compute Rule 8D(2)(iii) by considering only those investments which actually yielded exempt income during the year, and required the assessee to furnish the relevant investment details. Conclusion: Disallowance under Rule 8D(2)(iii) was ordered to be recomputed by restricting the base to income-yielding investments; the related ground (including additional grounds on strategic/non-income-yielding investments) was allowed for statistical purposes to that limited extent.