No s. 14A disallowance if tax-free investments capable of taxable income

Avshesh Mercantile P. Ltd. vs. DCIT (ITAT Mumbai)

The assessee, an investment company, issued optionally convertible premium notes which entitled the holder thereof to a premium on redemption. The proceeds of the issue was invested by the assessee in acquiring the shares of Reliance Utilities and Power Ltd (“RUPL”), the income whereof was exempt u/s 10(23G). The assessee claimed a deduction of the premium paid to the holders of the notes which was rejected by the AO & CIT (A) on the ground the expenditure was incurred in respect of tax-free income and so deduction could not be allowed u/s 14A. Before the Tribunal, the assessee argued that s. 14A could not apply because (a) though the dividends and LTCG on the shares of RUPL were exempt u/s 10(23G), the STCG & stock-lending income were not exempt and (b) the assessee had in fact not received any tax-free income on the shares. HELD upholding the assessee’s plea: