Section 14A applicable to strategic investment generating exempt dividend income

ACIT Vs Assam Bengal Carriers (ITAT Kolkata)

Introduction: The case of ACIT vs. Assam Bengal Carriers, adjudicated by ITAT Kolkata, delves into the intricacies of Section 14A disallowance. The backdrop includes the Supreme Court’s significant ruling in Maxopp Investment Ltd. vs CIT, emphasizing the necessity of apportioning expenditure concerning dividend income.

Detailed Analysis: The Assessing Officer (A.O.) disallowed ₹1,36,02,161 under Section 14A, applying Rule 8D, rejecting the assessee’s claim that strategic investments incurred nominal or no expenditure. The A.O. believed that the complex nature of investment decisions involved costs, especially the interest element due to fund blocking.

The Ld. CIT(A) partially allowed the appeal, excluding strategic investments, relying on earlier decisions and specific details of the dividend-earning shares. The decision was based on the principle that strategic investments, aiming for controlling interests, had an incidental dividend, making them exempt from Section 14A.

However, the ITAT, challenging the Ld. CIT(A)’s decision, referred to the recent judgment in Maxopp Investment Ltd. vs CIT. The Supreme Court held that the purpose of investment isn’t crucial; when dividend income is not taxable, Section 14A applies to apportion expenditure between taxable and non-taxable income. The expenditure related to strategic investments requires proportionate apportionment based on case facts.

The ITAT set aside the Ld. CIT(A)’s order, recognizing the applicability of the Maxopp decision. The case was remanded to the A.O. for re-computation of the Section 14A disallowance, considering the strategic investments in light of the Supreme Court’s principles.

Conclusion: In conclusion, the ACIT vs. Assam Bengal Carriers case highlights the evolving landscape of Section 14A disallowance, shaped by the recent Maxopp Investment Ltd. vs CIT judgment. The strategic nature of investments doesn’t absolve them from apportioned expenditure scrutiny. This decision emphasizes the need for meticulous computation based on the specificities of each case, aligning with the Supreme Court’s position on the matter.

The impact of this case extends beyond the immediate dispute, signaling a nuanced understanding of Section 14A and reinforcing the relevance of the Maxopp decision in determining the disallowance concerning dividend income. Taxpayers and practitioners should closely observe the developments and adjustments made in light of this evolving legal landscape.

Supreme Court in the case of Maxopp Investment Ltd. vs CIT (Civil Appeal Nos. 104 -109 of 2015 dated February 12, 2018) held that the dominant purpose for which the investment into shares is made by the assessee is not the relevant factor in determining the issue relating to u/s 14A. It is held that when dividend income earned by the assessee is not taxable, the expenditure which is attributable to the dividend income has to be disallowed. It is held that when the strategic investment made in the shares generates dividend income which is not taxable, section 14A becomes applicable which is based on the theory of apportioning of expenditure between taxable and non-taxable of income. It is held that the expenditure incurred in acquiring the shares as strategic investment therefore will have to be apportioned depending on facts of each case. Relying on this decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra), the learned DR has contended that this issue has to go back to the A.O. for re-computation of the disallowance of u/s 14A.

ITAT set aside the impugned order of the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for re­computing the disallowance to be made u/s 14A in the light of the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra).

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This appeal is preferred by the revenue against the order of Ld. CIT(Appeals) – 12, Kolkata dated 04.10.2017 whereby he restricted the disallowance made by the A.O. u/s 14A of the Income Tax Act, 1961 read with Rule 8D of Income Tax Rules, 1962.

2. The assessee in the present case is a partnership firm which filed its return of income for the year under consideration on 31.07.2014 declaring a loss of Rs. 1,36,90,063/-. In the said return, dividend income of Rs. 14,52,314/- was claimed to be exempt by the assessee and a disallowance of Rs. 14,521/- was offered u/s 14A for expenses incurred in relation to the said exempt income. During the course of assessment proceedings, the assessee was required by the A.O. to furnish the computation of disallowance offered by the assessee u/s 14A. The assessee was also required by the A.O. to explain the treatment given by it to the substantial interest expenditure while computing the disallowance u/s 14A. In this regard, it was submitted by the assessee that the major amount of dividend income was earned by it from M/s. ABC India Ltd. and the investment in ABC India Ltd. being strategic one, there was hardly any expenditure required to be incurred for the same. This explanation of the assessee was not found acceptable by the A.O. According to him, investment decisions were for complex in nature and there was huge investment in shares and consequent blocking of funds. He also observed that the raising of capital involved cost and the element of such cost was represented by interest. He, therefore, did not accept the claim of the assessee that the dividend income could be earned by incurring no or nominal expenditure and by applying Rule 8D, he computed the expenses incurred by the assessee in relation to the exempt income at Rs. 1,36,16,682/-. Since the disallowance of Rs. 14,521/- was already offered by the assessee u/s 14A, the balance amount of Rs. 1,36,02,161/- was disallowed by the A.O. u/s 14A.

3. The disallowance made by the A.O. u/s 14A read with Rule 8D was challenged by the assessee before the Ld. CIT(A) and after considering the submissions made by the assessee as well as material available on record, the Ld. CIT(A) directed the A.O. to recompute the disallowance u/s 14A without taking into consideration the strategic investment made by the assessee in the shares of ABC India Ltd. and accordingly restricted the disallowance vide paragraph 4.3 of his impugned order which is reads as under:

“I have considered the facts of the case and the submissions of the appellant in the present case similar issues were dealt in the appellants cases for A.Y.s 2012-13 and 2013-14 by the undersigned. The appellant was given relief on similar grounds which was contested by the Revenue before the Hon’ble ITAT, Kolkata. The Hon’ble ITAT vide their judgement dated 07.07.2017 gave relief to the assessee stating that ‘we have heard the rival submissions. We find that the assessee had derived dividend income only from the following shares in Asst. Year 2012-13:-

One of the aforesaid investments, the Ld. A.R. agreed that only the investment made in ABC India Ltd. would be strategic investment and other investments are not strategic in nature. We find that the Ld. CIT(A) had also given a categorical finding to the effect that investment made by the assessee firm in ABC India Ltd. is a strategic investment. This fact has not been controverted by the revenue before us. It is already settled by the order of this tribunal in the case of REI Agro Ltd. reported in 144 ITD 141 (Kol ITAT) wherein it was held that only dividend bearing investments must be considered for the purpose of disallowance u/s 14A of the act read with Rule 8D of the Rules. We find that the issue of exclusion of strategic investments for the purpose of disallowance u/s 14A of the Act has been decided by the co-ordinate bench of this tribunal in the case of DCIT vs. Binani Industries Ltd. reported in 178 TTJ 658 (Kol) dated 02.03.2016; DCIT vs Selvel Advertising P. Ltd. reported in 37 ITR (Trib) 611 (Kol Trib) and Harbanslal Malhotra & Sons P. Ltd. vs DCIT in ITA No. 5/Kol/2014 (Kolkata Trib), wherein it has been categorically held that the strategic investments are made by an assessee only in order to gain controlling interest in the said company and any dividend earned thereon would only be incidental in nature and hence the same shall be outside the purview of disallowance u/s 14A of the Act read with Rule 8D of the Rules. Respectfully following the said decisions, we hold that the investment made by the assessee in ABC India Ltd., being a strategic investments shall be outside the purview of disallowance u/s 14A of the Act. However, the other three investments shall be falling under the purview of disallowance u/s 14A of the Act read with Rule 8D of the Rules. Hence the Ld. A.O. is directed to consider the disallowance thereon after excluding investment made in ABC India Ltd. and including other dividend bearing investments only. Accordingly, the grounds raised by the revenue are partly allowed.

Thus the appellant gets relief based on the findings of the Hon’ble ITAT. Strategic Investments shall be outside the purview of disallowance u/s 14A of the Act and the A.O. may calculate the disallowance accordingly. The appeal may be treated as allowed.”

Aggrieved by the order of the Ld. CIT(A), the revenue has preferred this appeal before the Tribunal.

4. I have heard the arguments of both the sides and also perused the relevant material available on record. As contended by the learned DR, the relief allowed by the Ld. CIT(A) to the assessee on the issue of disallowance u/s 14A by holding that such disallowance cannot be made in respect of strategic investment is contrary to the latest decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (Civil Appeal Nos. 104 -109 of 2015 dated February 12, 2018). As held by the Hon’ble Supreme Court in the said case, the dominant purpose for which the investment into shares is made by the assessee is not the relevant factor in determining the issue relating to u/s 14A. It is held that when dividend income earned by the assessee is not taxable, the expenditure which is attributable to the dividend income has to be disallowed. It is held that when the strategic investment made in the shares generates dividend income which is not taxable, section 14A becomes applicable which is based on the theory of apportioning of expenditure between taxable and non-taxable of income. It is held that the expenditure incurred in acquiring the shares as strategic investment therefore will have to be apportioned depending on facts of each case. Relying on this decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra), the learned DR has contended that this issue has to go back to the A.O. for re-computation of the disallowance of u/s 14A. The learned counsel for the assessee, on the other hand, has not disputed that the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra) is applicable and the expenditure for the purpose of disallowance u/s 14A in relation to the strategic investment has to be computed on proportionate basis as held by the Hon’ble Supreme Court. He, however, has contended that the Assessing Officer was required to record his satisfaction in the assessment order for not having accepted the disallowance offered by the assessee u/s 14A and in the absence of such satisfaction, the further disallowance made by him u/s 14A was not sustainable. He has contended that this issue was specifically raised by the assessee during the course of appellate proceedings before the Ld. CIT(A) but the same has not been considered and decided by him. I am unable to accept this contention of the learned counsel for the assessee. A perusal of the order of the A.O. clearly shows that the claim of the assessee of having earned the dividend income by incurring nominal expenditure was rejected by the A.O. and reasons for such rejection were also specifically given by him. In my opinion, the findings / observations recorded by the A.O. in this regard are sufficient to show his satisfaction and the contention raised by the learned counsel for the assessee by relying on the absence of such satisfaction cannot be accepted. I, therefore, set aside the impugned order of the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for re­computing the disallowance to be made u/s 14A in the light of the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd.. (supra).

5. In the result, the appeal of the revenue is treated as allowed.

Order Pronounced in the Open Court on 24^th May, 2018.