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In the instant case the dividend earned on shares by the respondent assessee is from its investments in shares out of the respondent-assessee’s own funds. Consequently, the question of invoking Section 14A of the Income Tax Act,1961 to disallow expenditure would not arise.
As rightly submitted by learned counsel for the assessee, the impugned order of the learned Commissioner of Income-tax (Appeals) is well reasoned and well discussed on this issue and the same is self explanatory as regards the reasons given by him for deleting the additional disallowance of Rs. 5,98,139 made by the Assessing Officer under section 14A. As held by him relying on the decision of the hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra), rule 8D applied by the Assessing Officer to work out the disallowance under section 14A was not applicable to the year under consideration.
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.
In order to be covered under section 22, it is sine qua non that the assessee must be the owner of the house property as per section 27 read with section 269UA(f). In the instant case, the assessee is not the owner of the property. It cannot also be considered as deemed owner of house property within the meaning of section 27 because it took property on lease for a period of three years. Since the assessee was neither the owner nor the deemed owner of the house property, applying the provisions of section 22, the annual value of such property could not have been charged to tax under the head ‘Income from house property’. As it was a case of simple subletting of property, not facilitating the carrying on of the assessee’s business in any manner, the rental income so realized by the assessee could not be considered as ‘Business income’. In such a situation, the same should be included under the head ‘Income from other sources’. The impugned order on this issue is set aside and the matter is restored to the file of the Assessing Officer for doing the needful accordingly.
In our humble understanding, the provisions of Section 14A are indeed attracted whether or not the shares are held as stock in trade or as investments, even though the provisions of rule 8D(2)(ii) and (iii) cannot be invoked in such a case, and even though the provisions of rule 8 D(2)(i) are much narrower in scope than the scope of Section 14 A simplictor.
The dispute is regarding disallowance of expenses relating to exempt income under section 14A of the Act. Under the said provisions, the disallowance of expenses relating to exempt income is required to be computed as per Rule 8D. The Hon’ble High Court of Bombay in the case of Godrej and Boyce Mfg. Co. v. Dy. CIT [2010] 328 ITR 81 have held that Rule 8D is applicable only from assessment year 2008-09 and in respect of prior years, it was held that disallowance had to be made on a reasonable basis after hearing the assessee. In this case, CIT(A) directed the AO to make disallowance as per Rule 8D which is not correct. We, therefore, set aside the order of CIT(A) and restore the matter back to him for necessary examination in the light of judgment of Hon’ble High Court of Bombay in case of Godrej and Boyce Mfg. Co. (supra) and for passing a fresh order after affording opportunity of hearing to the assessee.
The appeal is, however, time barred by 24 days. The Assessing Officer has moved a petition seeking condonation of this delay. Having perused the said petition, and having heard rival contentions on the same, we are inclined to condone the delay as the delay seems to have been explained by a reasonable cause. Accordingly, we condone the delay and proceed to take up the matter on merits.
Both the CIT(A) as well as the ITAT have set aside the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Income Tax Act, 1961 on the ground that the issue of deduction under Section 14A of the Act was a debatable issue.
Assessment Officer in its order dated 28th January, 2005 did not make provision for disallowance of expenditure in terms of Section 14A of the I.T. Act. The assessee has paid interest of Rs.4,49,02,775/- out of which only a sum of Rs.1,33,51,132/- was shown to be relatable to the non-taxable income. The assessee did not maintain any separate accounts for the purpose of the exempt income. The assessee did not give one to one co-relation between the funds available and the funds deployed.
Share application money’, to the extent it is actually so, so that it only represents amount/s paid by way of application for allotment of shares, the same cannot be regarded as an investment in shares, or an asset (or asset class) yielding tax-free income, and neither is it capable of yielding any tax-free income.
