DCIT, NEW DELHI vs. M/S. ASF INFRASTRUCTURE PVT. LTD., NEW DELHI

ORDER ORDER ORDER ORDER This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-I, New Delhi dated 22.4.2016 pertaining to assessment year 2012-13 on the following grounds:-

CIT(A) has erred in deleting addition of Rs. 35,03,719/- made by the AO on account of disallowance of expenses u/s. 14A read with Rule 8D.

2. The appellant craves leave for reserving the right to amend,

modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.

I have considered the submission of the appellant and observation of the Assessing Officer. It is claimed by the appellant that it has made investment in the group companies for strategic purposes and not for earning dividend income, therefore, Section 14A cannot be applied. These investments are made for acquiring controlling stake in group companies and providing finance to them. It is also claimed by the appellant that no dividend income has been received by the appellant from the investments made in the group companies. The AR of the appellant claimed that no expenses have been incurred during the year for making investment in these companies. The appellant has relied upon the judgment of Hon'ble Delhi High Court in the case of CIT Vs. Holcim India Pvt. Ltd. and Maxopp Investment Ltd. Vs. CIT 347 ITR 272 wherein it is held that if investment is made for strategic purposes and not for earning dividend then provisions of Section 14A cannot be applied on such investments. Considering the facts of the case it is held that Section 14A cannot be applied on the investments made in subsidiary and joint venture companies and it should be restricted to the investments made in listed companies. The AO is therefore, directed to delete the addition of RS.35,03,719/-. Reliance in this regard is placed on the judgment of Hon'ble Delhi High Court judgment in the case of CIT Vs. Holcim India Pvt. Ltd. 57 taxmann.com 28 (Delhi):

"Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Investment) - Assessment years 2007-08 and 2008-09- Whether where business of assessee as an investment company had been set up and commenced and genuineness of expenses and fact that it was incurred for business activities was not doubted by lower authorities, expenditure under section 14A, was allowable - Held, yes [Para 16][ln favour of assessee] FACTS • The assessee was a subsidiary of Holderind Investments Ltd., Mauritius, formed as a holding company for making downstream investments in cement manufacturing ventures in India. 4 • For the assessment year 2007-08, the assessee claimed administrative and miscellaneous expenses expenditure written off amounting to Rs. 8.75 crores and for the assessment year 2008- 09, the assessee had claimed expenses amounting to Rs. 7.02 crores as personal expenses, operating and other expenses, depreciation and financial expenses.

In the two assessment orders, the Assessing Officer held that the assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investment, he accordingly disallowed the' entire expenditure for both the years.

• The Commissioner (Appeals), confirmed the disallowance made by the Assessing Officer. He held that the business of the assessee was exclusively to act as a holding company for downstream investment in older companies and the expenditure incurred was on salaries of employees of the assessee company and other operating expenses of the company. The assessee had also admitted that the said expenditure had been incurred in order to protect their investment as well as exploration of new investments which gives rise to income which does not form part of total income which clearly showed that in the assessee's case the provisions of section 14A were applicable. Hence, entire expenditure was not allowable in view of section 14A.

Thereafter, the Commissioner (Appeals) referred to the contentions of the assessee that they had not earned dividend income and therefore, section 14A was not applicable. The Commissioner (Appeals) did not agree that as no exempt income was claimed, no disallowance under section 14A was warranted.

• On appeal, the Tribunal reversed the finding of the Commissioner (Appeals) by specifically noticing that the Commissioner (Appeals) did not make disallowance on the ground that the assessee had invested in the shares for earning of the dividends but, on the ground that the assessee had acquired controlling interest in the respective companies and this was their line of business. Therefore, the Tribunal observed that there was a contradiction in the submissions made by the departmental representative the: the assessee had acquired shetes for earning of dividends and hence allowed the appeal of the assessee.

• On appeal by revenue to High Court: 6 HELD • Income exempt under section 10 in, a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long-term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of sneresin an off market transaction attracts capital gains tax.

It is an undisputed position that assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend mayor may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.{Para 15] • What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the assessee for conducting business. The Commissioner (Appeals) has positively held that the business was set up and had commenced. The said finding is accepted. The assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the Commissioner (Appeals).[Para 16] • If Jhese circumstances, there is no merit in the present appeals and the same are dismissed in Iimine.[Para 17]"

Cheminvest Ltd. Vs. CIT 61 taxmann.com 118 (Delhi) wherein it has held as under:

"Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Applicability) - Assessment year 2004-05 - Whether section'14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year - Held, yes [Para 23J [In favour of assessee)

FACTS • The assessee was engaged in business of making investment in shares and accepting/granting of loans. For the assessment year in question, the assessee filed a return of income declaring a loss of Rs. 13,84,086.

• This case was picked up for scrutiny and the Assessing Officer completed the assessment disallowing Rs. 97,87,570/- out of the total expenditure incurred during the year under section 14A. The reason recorded by the Assessing Officer for this disallowance was that the borrowed funds were utilized for the purpose of purchase of shares for the purpose to earn dividend income which was exempted under section 10(33) and thus, not forming a part of the total income, and therefore the interest paid thereon had to be disallowed under section 14A.

• The Commissioner (Appeals) upheld the applicability of section 14A but agreed with the contention of the assessee that only the net interest amount debited in the profit and loss account was required to be proportionately disallowed under section 14A.

In appeals filed by both the revenue and the assessee, the Tribunal held that disallowance under section 14A can be made even in a year in which no exempt income has been earned or received by assessee.

• On appeal:

HELD • In the present case, the factual position that has not been disputed is that the investment by the assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the assessee is in relation to such investments which gives rise to income which does not form part of total income. [Para 18] • In light of the clear exposition of the law in CIT v. Holcim India (P.) Ltd. [20151 57 taxmann. com 28 (Delhi) and in view of the admitted factual position in this case that the assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee is not in doubt, the question framed is required to be answered in favour of the assessee and against the revenue . {Para 19].

In the context of the facts enumerated the question framed was answered by holding that the expression 'does not form part of the total income' in section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous yew. [Para 23] • Consequently, the impugned order of the Tribunal is set aside and the appeal is allowed in the above terms. This Court should not be understood to have expressed any opinion on the issue of whether for the assessment year in question the interest expenditure incurred by the assessee would be allowable as business expenditure under section 36 (1 )(iii). [Para 24]"

The appellant has also relied upon the judgment of Hon'ble Allahabad High Court in the case of CIT Vs. Shivam Motors Pvt. Ltd. wherein it has held as under:

As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03, 752/- made by the Assessing Officer was in order Commissioner of Income-tax v. Oriental Structural Engineers (P.) Ltd. [ 2013 ] 35 taxmann.com 210 (Delhi) HIGH COURT OF DELHI IT APPEAL NO. 605 OF 2012 "Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible In total income [lnterest1 - Assessment year 2008-09 - Commissioner (Appeals) found that only a part of interest was paid on funds that was utilized for making investments on which exempted income was receivable, while major vestment was made in subsidiary company to form Special Purpose Vehicle to obtain NHAI contract - Further, Tribunal held that expenses which had been claimed by assessee were not towards exempted income - Whether in view of factual finding recorded by Tribunal, disallowance was to be limited - Held, yes [Para 31 [In favour of assessee]"

The facts of the above cited judgments are identical to the facts of the appellant's case. Therefore, the ratio of the above judgments is squarely applicable in the case of appellant. Hence, investment made in the group companies for strategic purposes , cannot be considered for disallowance u/s 14A of the I.T. Act.

Hence, the disallowance of Rs.35,03,719/- is deleted.

5.1 On going through the aforesaid finding of the Ld. CIT(A) , I find that it has been claimed by the assessee that it has made investment in the group companies for strategic purposes and not for earning dividend income, therefore, Section 14A cannot be applied. These investments are made for acquiring controlling stake in group companies and providing finance to them. I further find that it is also claimed by the assessee that no dividend income has been received by the assessee from the investments made in the group companies. In this case no expenses have been incurred during the year for making investment in these companies. Hence, Ld. CIT(A) has rightly followed various judgments including the judgment of the Hon'ble Delhi High Court in the case of CIT Vs. Holcim India Pvt. Ltd. and Maxopp Investment Ltd. Vs. CIT 347 ITR 272 wherein it has been held that if investment is made for strategic purposes and not for earning dividend then provisions of Section 14A cannot be applied on such investments. Therefore, considering the facts of the case it was held by the Ld. CIT(A) that Section 14A cannot be applied on the investments made in subsidiary and joint venture companies and it should be restricted to the investments made in listed companies. Accordingly, Ld. CIT(A) has rightly directed the AO to delete the addition of RS.35,03,719/-, which does not need any interference on my part, hence, I uphold the order of the Ld. CIT(A) on the issue in dispute.

Order pronounced in the Open Court on 13/12/2016.