Disallowance U/s. 14A not applicable on investment on which dividend received is chargeable to tax but allowed Rebate under DTAA

ACIT Vs M/s. Indian Farmers Fertiliser Cooperative Ltd (ITAT Delhi)

Levy of income tax on global income of an Indian resident is thus subject, inter- alia, to provisions of Section 90(2) of the Act, in terms of which provisions of DTAA entered into by India with any other country would apply and prevail over the provisions of the Act, to the extent the provisions of such DTAA are more beneficial to the assessee entitled to benefits of the DTAA. Thus, where the income is taxable under the Act but is exempt under the DTAA, tax under the Act is not leviable thereon. The Ld. AR submitted that in the instant case the dividend received by the assessee from OMIFCO, Oman through its PE is chargeable to tax in India under the head “Income from other sources” and forms part of the total income and after such inclusion the rebate of taxes has to be allowed from the total taxes in terms of Section 90(2) of the Act read with Article 25 of the Indo-Oman, DTAA which the AO has done. It was submitted that consequently the provisions of Section 14A are not applicable to dividend received from OMIFCO, Oman in as much as the income is included in the total income of assessee.  

FULL TEXT OF THE ITAT JUDGMENT

Present appeal has been filed by Revenue against the order dated 20^th May, 2014 passed by Ld. CIT (A) 11, New Delhi for Assessment Year 2006-07 on the following grounds:

“1. Whether the Ld.CIT(A), on the facts and in circumstances of the case, has erred in deleting disallowance of an amount of Rs.140.19 lakhs made by the A.O. u/s 14A, as the assessee has claimed deduction of expenses in relating to income which is exempt from tax.

2. The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of appellate proceedings before Hon’ble ITAT.”

2. Facts of the case in brief:
Assessee filed its return of income on 31.10.2006 declaring total income of Rs.323,56,23,021/- which was processed u/s 143(1) of the Income Tax Act, 1961 (the Act) at the returned income and subsequently case was selected for scrutiny and notice u/s 143(2) was issued and assessment was completed u/s 143(3) on 30.11.2009 at an income of Rs.355,10,00,239/-comprising disallowance u/s 14A read with Rule 8D(2)(ii) of Rs.11,42,32,000/- and Rs.3,66,72,225/-. Assessee preferred appeal before the Ld. CIT(A) against the above order and vide order in appeal No. 174/2009-10 dated 24.11.2010, Ld. CIT(A) confirmed the disallowance made u/s. 14A/36(l)(iii). Against the order passed by the Ld. CIT(A), assessee moved further appeal before the Hon’ble ITAT impugning the confirmation of disallowance made u/s. 14A read with rule 8D and Hon’ble ITAT vide its order in ITA No. 1087/Del/2011 dated 05.09.2011 restored the matter back to the file of the AO for re-examination of the claim of the assessee in the light of the decision of the Hon’ble Mumbai High Court in the case of Godrej Boyce Manufacturing Company Ltd. vs. DCIT in ITA No. 626 of 2010, 234 CTR). AO considered the submissions of the assessee as referred to above and he observed that the dividend and long term capital gain which suffers DDT/STT are fully exempt in the hands of the tax payer but dividend income from joint venture with OMIFCO, Oman which may accrue to it, assessee is not effectively paying any tax on this income either in the Source Country or in India.

2.1. A.O. therefore computed the expenses under S.14A r.w. Rule 8D by including investments in OMIFCO, Oman.

2.2. Aggrieved by the order of Ld.AO assessee preferred appeal before Ld.CIT(A).
Ld.CIT(A) by placing reliance on the orders of his predecessor for A.Y. 2008-09 and 2009-10, deleted the investments made by assessee in Oman Company for the purposes of computing disallowance u/s 14A r.w. Rule 8D.

3. Aggrieved by the order of Ld.CIT(A) assessee preferred appeal before this Tribunal.

4. DR placed reliance upon the order of Ld.AO and submitted that assessee is receiving relief u/s 90 r.w. DTAA with Oman at 30% on the dividend income received by PE from OMIFCO, Oman.

5. On the contrary Ld.AR placed reliance upon the orders of the Coordinate Bench of this Tribunal for A.Y. 2006-07, 2008-09 and 2009-10 wherein direction had been passed to Ld.AO to recompute the disallowance u/s 14A by excluding the investments made by assessee in OMIFCO, Oman.

5.1. Ld.AR has placed reliance upon a chart wherein the details of dividend received by assessee have been bifurcated which is as under: