2016 (8) TMI 1521 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - Assessee made certain investment with an object of acquiring controlling stake in a group concern and not for earning any income out of investment, Assessing Officer was not justified in invoking provisions of section 14A, read with Rule 8D in order to disallow a part of incidental dividend income earned on said investment. Similarly in Rainy Investments Pvt. Ltd. 2013 (1) TMI 961 - ITAT MUMBAI has held that share application money cannot be regarded as an investment in shares, or an asset yielding tax-free income, and neither is it capable of yielding any tax-free income, thus no disallowance can be made u/s 14A. In the present case as per the working of the average value of tax free investment under rule 8D submitted by the assessee, the assessee had made investment of ₹ 13,73,00,000/-. Assessing Officer should not have included the share application money while working out the average value of investment under Rule 8D. Therefore, the Ld. CIT(A) has rightly issued the direction to the A.O to exclude share application money of ₹ 13,73,00,000/- for the purpose of computation of disallowance of u/s 14A.

Summary

Issues:
1. Whether the Assessing Officer should exclude share application money from the computation of disallowance under section 14A of the Income Tax Act.

The appeal before the Appellate Tribunal ITAT Mumbai involved a dispute regarding the exclusion of share application money from the computation of disallowance under section 14A of the Income Tax Act for the assessment year 2011-12. The Assessing Officer had made a disallowance under section 14A, which was challenged by the assessee before the Ld. CIT(A). The Ld. CIT(A) directed the Assessing Officer to exclude the share application money of ?13,73,00,000 from the investment made by the assessee for the purpose of computation of disallowance under section 14A. The revenue contended that the investment would result in exempt incomes in the future, and the expenditure related to the investments was debited to the Profit & Loss account during the financial year. The Departmental Representative argued that the order of the Ld. CIT(A) should be set aside. However, the Authorized Representative of the assessee relied on various decisions by ITAT Kolkata and ITAT Mumbai to support the exclusion of share application money from the computation under Rule 8D(2)(iii) of the Income Tax Rules.

After hearing the submissions and examining the case law cited by both parties, the Appellate Tribunal noted that share application money does not convert into shares until allotment by the company, and until then, the applicant does not have the rights of a shareholder. Therefore, share application money cannot be considered an investment likely to earn tax-free dividend income, leading to no disallowance under section 14A. Referring to previous decisions, the Tribunal held that if an investment is made not for earning income but for acquiring a controlling stake or is not capable of yielding any tax-free income, no disallowance under section 14A can be made. In this case, the Tribunal agreed with the Ld. CIT(A) that the share application money should be excluded from the computation of disallowance under section 14A, in line with the decisions of ITAT Kolkata and ITAT Mumbai. Consequently, the Tribunal upheld the order of the Ld. CIT(A) and dismissed the appeal filed by the revenue for the assessment year 2011-12.