Whether when assessee makes huge investment for acquiring controlling stake in loss-making company, its expenditure warrants disallowance u/s 14A for lack of earning dividend income - NO: ITAT

THE issue before the Bench is - Whether when the assessee makes huge investment for acquiring controlling stake in a loss-making company, its expenditure warrants disallowance u/s 14A for the lack of earning dividend income. And the verdict favours the assessee.

Facts of the case

Assessee is a holding investment company. It had made huge investment in M/s Ambuja Cement Ltd., to acquire the controlling interest in it by purchasing their shares. Assessee under section 14A claimed expenditure for the A.Y. 2008-09 and A.Y. 2007-08. The AO noticed that the business of the assessee was not yet set up and started, therefore, disallowed various expenses claimed in its P&L A/c. Further AO said that the assessee had also not disclosed any dividend income from its investment with M/s Ambuja Cements Ltd., as appeared in the balance sheet of the company. Therefore, AO disallowed the expenses claimed in the P&L A/c and the similar disallowance was made for AY 2008-09. In appeal the CIT(A) held that the “entire expenditure is not allowable in view of Section 14A of the Act. Thus, disallowance made by the AO is confirmed though on a different ground and as such, the appeal preferred by the appellant is dismissed” . Similar findings were recorded by CIT(A) for A.Y. 2008-09

On appeal before the Tribunal, the AR submitted that the CIT(A) had no jurisdiction to enhance the income on an issue which had not been considered by the A.O. It was further submitted that even on merits no disallowance was warranted under section 14A as assessee had not made any investment for earning the dividend. The assessee had made huge investment with the approval of the appellate authority to acquire the controlling interest in the companies of whom the assessee had purchased shares. It was further stated that till date the assessee had not earned any dividend by doing its business in those companies of which the shares have been purchased by the assessee. It was further explained that these shares were purchased for acquiring the controlling interest of those companies. The assessee has paid no interest as entire expenditure was made on account of salary, other administrative expenses etc. which had no connection for earning of dividend as all these expenses were incurred for business purposes and as assessee had controlling interest in these companies. It was further submitted that even for A.Y. 2007-08 Rule 8D was not applicable. DR submitted that the CIT(A) had power to enter into the shoes of assessing officer and therefore disallowance u/s 14A was correctly made.

In reply it was submitted by the AR that CIT(A) had not given any finding that assessee had not made investment for the purpose of doing business or acquiring the controlling interest in those companies of which shares were purchased. No body will invest such a huge amount for just for earning of dividend. As against, assessee was doing the business in those companies. Neither any dividend had been earned by the assessee nor those companies had declared any dividend till date. Therefore, this was not a case of earning the exempt income but this was a case of doing business.

Having heard the parties, the Tribunal held that,

++ the decision in the case of Gurinder Mohan Singh Nindrajog, is applicable on the facts of the present case where the High Court has held that CIT(A) has no power to make the disallowance or addition where assessing officer has not applied his mind. If any disallowance escaped the attention of the assessing officer, then remedial action can be taken either by issuing notice u/s 148 or initiating proceedings u/s 263 of the Act. In the present case AO has not made any disallowance u/s 14A, as he disallowed the entire expenditure by holding that business of the company has not set up. The CIT(A) has accepted the ground of the assessee that business was set up and expenditure claimed in the P&L A/c cannot be disallowed. However, he disallowed the entire expenditure u/s 14A which was not disallowed by the assessing officer. Therefore, respectfully following the decision of the High Court the tribunal holds that CIT(A) has assumed jurisdiction wrongly for making disallowance u/s 14A of the Act;

++ in the facts of the present case the investment was purely of business nature as the company in which the amount was invested was a loss making company and there was no question of earning any dividend income from such investment. In the totality of the facts and circumstances of the case we find no merit in the order of the authorities below in disallowing any expenditure under the garb of section 14A of the Act;

++ assessee has invested in the companies which were not showing profits. The assessee acquired controlling interest in those companies just to run these companies properly. AR submitted that till date no dividend has been earned by the assessee as assessee is doing the business in these companies from the amounts invested through shares;

++ the assessee case is not a case of disallowance under section 14A. Therefore, the disallowance made under section 14A for both the years were deleted.