By TIOL News Service

MUMBAI, APR 27, 2016: THE issue is - Whether the expenses connected with exempt income have to be disallowed u/s 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial and whether the income is earned or not earned. YES is the answer.

Facts of the case

The assessee company is engaged in the business of generation of power produced through wind turbine generators. During the course of assessment proceedings u/s 143(3) read with Section 143(2), AO observed that the assessee company made investment in shares , income from which does not or shall not form part of the total income . The assessee company held at the beginning of the year investment of Rs. 3 crores which were increased to 9.10 crores during the year. The AO further observed that the assessee company ought to have made disallowance of expenditure in relation to the income which does not or shall not form part of total income as required u/s 14A in accordance with the provisions of Rule 8D. The assessee company contended it has its own funds as well as free reserves out of which the assessee company has made such investments and as such no interest cost is incurred by the assessee company for making such investment and as such interest expenditure is not disallowable u/s 14A. AO had not accepted the contentions of the assessee company and applied Rule 8D(2)(iii) and disallowed 0.5% of average of the investments held by the assessee company, whereby total disallowance of Rs. 3,02,500/- was made by the AO vide orders dated 31.01.2013 . On appeal, CIT(A) held that all expenses connected with the exempt income have to be disallowed u/s 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial and whether the income is earned or not earned, thus CIT(A) upheld the additions made by the A.O.

Having heard the matter, the Tribunal held that,

++ we have observed that the assessee company has made investment in its group companies of Rs. 9,10,00,000/- as at 31-03-2010 , while the same was Rs.3,00,00,00.00 as at 31-03-2009. We have observed that the assessee company has own funds of around Rs. 40.79 crores as at 31-03-2010 which comprises share capital and reserves as per balance sheet filed in the paper book. We have also perused the copy of balance sheet as well as the P&L account where it is clear that the assessee company has earned no dividend income during the previous year relevant to the assessment year and in view of the decision of Delhi High Court in the case of Cheminvest Ltd., the ratio laid down therein is squarely applicable to the present case of the assessee company. In our considered view based on our above discussions and reasoning , the CIT(A) is not correct in upholding the orders of the A.O. and hence we delete the disallowance made by the A.O. and as confirmed by the CIT(A) and allow the appeal filed by the assessee company. We order accordingly. In the result, the appeal filed by the assessee company is allowed.

(See 2016-TIOL-624-ITAT-MUM)