PFA
No Disallowance U/s. 14A if Interest Free Fund exceeds fund Invested in Exempted Income Investments
CIT Vs. Suzlon Energy Ltd. (Gujarat High Court), Tax Appeal No. 223 Of 2013, Date- 03.04.2013
Issue- Whether the Appellate Tribunal is right in law and on facts in deleting disallowance u/s. 14A of the I.T Act in respect of interest expenses incurred for investments in subsidiaries and administrative expenses such as staff salary of corporate office, audit fees, building rent and communication expenses ?
Above pertains to disallowances made by the Assessing Officer under Section 14A of the Act in respect of interest expenses incurred for investments made in subsidiaries and administrative expenses. CIT [A] deleted such disallowances, upon which, Revenue approached the Tribunal. The Tribunal rejected Revenue's appeal, making following observations :‑
"3.5 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. Regarding the grounds raised by the revenue in respect of disallowance of interest expenditure made by the A.O under Section 14A and deletion made by learned CIT (A), we find that no interference is called for in the order of learned CIT (A). We hold so because we find that with regard to the investment of Rs. 5907.18 lacs in foreign subsidiaries, no disallowance can be made u/s. 14A because dividend income from foreign subsidiaries is taxable in India. Regarding balance investment of Rs. 38 crores approximately in Indian subsidiaries, we find that interest free own funds of the assessee is many time more than this investment because interest free funds available with the assessee as on 31.03.2005 as per the balance sheet as on that date is of Rs. 929.57 Crores. There is no finding given by the A.O regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance u/s. 14A can be made out of interest expenditure in the facts of the present case. Accordingly, ground no. 2 & 3 of the Revenue's appeal are rejected."
From the above portion, we noticed that the Tribunal has bifurcated the expenditure in two parts – first related to investment of Rs. 5907.18 lakhs in foreign subsidiaries, it was held that the dividend income from such subsidiaries is taxable in India and that therefore, Section 14A would have no applicability. The remaining amount pertain to investment of Rs. 38 Crores [rounded off] made in Indian subsidiaries. In this respect, the Tribunal noted that the assessee had to its disposal, own interest free funds many times over the investment in question. As per the balance sheet as on 31st March 2005, the assessee had interest free fund of Rs. 929.57 Crores.
Such being the facts, the Tribunal, in our opinion, committed no error. No question of law, therefore, arises.
Minda Sai Limited Vs. Income Tax Officer (ITAT Delhi), I.T.A. No.: 2974/Del/13, Date- 09.01.2015 Disallowance of Rs 2,00,225 under section 115JB on the ground that this amount pertains to disallowance under section 14A - Learned counsel for the assessee has invited our attention to Hon'ble Delhi High Court's decision in the case of CIT Vs […]
PFA
CIT Vs. Holcim India P. Ltd. (Delhi High Court) ITA No. 486/2014 & ITA No. 299/2014, Date of Decision: September 05, 2014 On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there
Section14A & Rule 8D disallowance cannot be made if there is no exempt income
CIT Vs. Holcim India P. Ltd. (Delhi High Court) ITA No. 486/2014 & ITA No. 299/2014, Date of Decision: September 05, 2014
On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.20 14. In the said decision it has been held:
"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2, 03,752/- made by the Assessing Officer was in order" .
Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in futureyears. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.
What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).
In these circumstances, we do not find any merit in the present appeals. The same are dismissed in limine.
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