There should be Exempt income for Sec. 14A/Rule 8D disallowance, Caselaw ACIT Vs M Baskaran (Chennai ITAT)

IN THE INCOME TAX APPELLATE TRIBUNAL , ‘B’ BENCH, CHENNAI
BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER
AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
    I .T.A.No.1717/Mds/2013
(Assessment Year : 2009-10)
Assistant Commissioner of
Income Tax,
Company Circle- I (2) ,
Chennai-34.
Vs Mr . M.Baskaran,
11/5, Val l iammal St reet ,
Alagappa Nagar ,Ki lpauk,
Chennai-600 010.
PAN: AAFPB8375E

Appellant by : Mr. Pramod Nangia, CIT
Respondent by : Mr. M.Karunagaran, Advocate
Date of hearing : 20th June, 2014
Date of Pronouncement : 31st July, 2014
O R D E R
Per Challa Nagendra Prasad, JM:
This appeal is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-VI, Chennai dated 22.02.013 for the assessment year 2009-10. The only grievance of the Revenue in this appeal is that the Commissioner of Income Tax (Appeals) erred in deleting disallowance made under section 14A read with Rule 8D holding that assessee has not received any exempt income and hence disallowance is unwarranted
2. The Assessing Officer while completing the assessment disallowed ` 19,28,666/- under section 14A read with Rule 8D of the Act as expenditure incurred for earning exempt income as the assessee was holding investments worth `14.05 crores and incurred interest expenses of ` 34.80 lakhs. On appeal the Commissioner of Income Tax (Appeals) deleted the disallowance holding that assessee has not derived income out of investments and investments are made
from his own source which did not suffer any interest. The Commissioner of Income Tax (Appeals) also observed that Assessing Officer should have excluded share application money from the working of the qualifying amount. Therefore
Commissioner of Income Tax (Appeals) following the ratio of  the decision in the case of Hero Cycles Ltd. (320 ITR 518) deleted the disallowance made under section 14A of the Act.

JM Financial Limited vs. ACIT (ITAT Mumbai)

No s. 14A/ Rule 8D disallowance for investment in shares of subsidiaries & Joint Ventures

In AY 2009-10, the assessee has specifically raised a point before the AO that 97.82% of the investment is in subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. 

The department has not disputed this fact that out of the total investment about 98% of the investments are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. 

The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In Godrej & Boyce Mfg. Co it was held that s. 14A(2) does not ifso facto empower the AO to apply the method prescribed by Rule 8D straightaway without considering whether the claim made by the assessee is correct. 
Also, in Garware Wall Ropes it was held that a disallowance u/s 14A cannot be made if the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. 

Similarly, in Oriental Structural Engineers (approved by the Delhi High Court) it has been held that s. 14A disallowance cannot be made for investment in subsidiaries and SPVs out of commercial expediency

SECTION 35

SCIENTIFIC RESEARCH EXPENDITURE

Where assessee-company, apart from rendering technical services to its clients, did research in field of development of wind power at its own, which was used for benefit of public, scientific research expenditure was to be allowed - Assistant Commissioner of Income-tax -1(1) v. Consolidated Energy Consultants Ltd. (2014) 41 taxmann.com 379 (Indore - Trib.)     SECTION 37(1) BUSINESS EXPENDITURE - ALLOWABILITY OF Software : Where assessee-company purchased application software, expenditure incurred towards purchase of software could not be treated as revenue expenditure - Srinivasa Resorts v. Assistant Commissioner of Income-tax (2014) 41 taxmann.com 350 (Hyderabad - Trib.)       SECTION 54F CAPITAL GAINS - EXEMPTION OF, IN CASE OF INVESTMENT IN RESIDENTIAL HOUSE Construction : In terms of section 54F, when assessee invests sale consideration in purchase of a residential property within prescribed time period, he is entitled to claim deduction and, in such a case, extent of construction of residential building and facilities provided in such building are not relevant - Commissioner of Income-tax v. Dr. R. Balaji (2014) 41 taxmann.com 411 (Karnataka)     SECTION 158BG BLOCK ASSESSMENT IN SEARCH CASES Where Assessing Officer as a result of search conducted under section 132 upon assessee passed a block assessment order on him, no opportunity of hearing was required to be given to assessee by Commissioner while granting approval under section 158BG - Commissioner of Income-taxv.Dr. K.P. Singh (2014) 41 taxmann.com 406 (Allahabad)       SECTION 194C DEDUCTION OF TAX AT SOURCE - CONTRACTORS/SUB-CONTRACTORS PAYMENT TO Lounging and Catering service : Where consolidated payment was made towards lounging and catering services as a part of single arrangement, it was not permissible to artificially bifurcate payment so made towards two limbs or component services in view of two attracting differential tax and same would fall under generalized contractual category under section 194C - Assistant Commissioner of Income-tax (TDS) -2(2) v. Qantas Airways Ltd. (2014) 41 taxmann.com 383 (Mumbai - Trib.) Cargo handling charges : Where assessee was engaged in business of clearing and forwarding of cargo, etc. and it made payments towards cargo handling charges to two parties and work involved was mainly labour oriented work with help of various machineries and equipments, TDS provisions of section 194C would be applicable with respect to said payments - Commissioner of Income-tax (TDS)v.Aditya Marine Ltd. (2014) 41 taxmann.com 381 (Gujarat)       SECTION 254 APPELLATE TRIBUNAL - ORDER OF Duties of Tribunal : Whenever any decision has been relied upon and/or cited by assessee and/or any party, Tribunal is bound to consider and/or deal with same and opine whether in facts and circumstances of particular case, same will be applicable or not - Dattani And Co. v. Income Tax Officer (2014) 41 taxmann.com 360 (Gujarat)     DIRECT TAX LAWS Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Clarification on disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year - CIRCULAR NO.5/2014 (F.NO.225/182/2013-ITA.II), DATED 11-2-2014 Section 119, read with section 115R of the Income-tax Act, 1961 - Income-tax Authorities - Instructions to subordinate authorities - Tax on distributed income to unit holders - Clarification on scope of additional income-tax on distributed income under section 115R - CIRCULAR NO.6/2014 (F.NO.225/182/2013-ITA.II), DATED 11-2-2014       Source : Taxmann

CBDT Circular On Application Of Section 14A And Rule 8D

The CBDT has issued Circular No. 5 of 2014 dated 11.02.2014 in which the issue as to whether disallowance under section 14A and Rule 8D can be made in cases where the corresponding exempt income has not been earned during the financial year has been considered in great detail.

Vide this Circular, CBDT has clarified that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.