Whether principle of apportionment embedded in Sec 14A will apply when no cost was incurred for exempt income & primary object of investment was to acquire controlling stake in Group Concern and not to earn any income - NO: ITAT

THE issues before the Bench are - Whether principle of apportionment embedded in section 14A has any application when no expenditure has been incurred in relation to the exempt income and the primary object of investment was to acquire controlling stake in the group concern and not earning any income out of investment and Whether depreciation has to be allowed on written down value (WDV) after reducing the actual depreciation allowed in the earlier years. And the verdict favours the assessee.

Facts of the case

The assessee received dividend income of Rs. 36,90,456/- which is exempt from the Income Tax. The assessee worked out the disallowance u/s 14A at Rs. 103915/- and added back the same in the statement of the total income. The Assessee claim that no borrowed funds was used and the interest expenditure is on the bank term loans, therefore, there is no nexus between the interest expenditure and the investment in shares. The AO disallowed the administrative expenses by applying Rule 8D. The AO accordingly worked out the disallowance at Rs. 8,83,569/- on administrative expenses. The CIT(A) has confirmed the disallowance made by the AO.

On Appeal before the Tribunal the A.R submitted that the assessee has not incurred any expenditure in respect of the investment in question and for earning tax free income. The AR further pointed out that the investments were in the group concerned of the assessee, therefore, these were only passive investment made for the purpose of holding controlling stake in the group concern and not for the purpose of earning any dividend or active investment, therefore, the assessee was not required to incur any expenditure in keeping these investments. The DR on the other hand has submitted that the issue is now covered against the assessee by the decision of the Tribunal in the assessee’s own case.

Having heard the parties, the Tribunal held that,

++ the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. The investment are in the group concern no reason to believe that the assessee would have incurred any administrative expenses .When no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The addition/disallowance made by AO u/s 14A r.w. Rule 8D deleted;

++ regarding disallowance/adjustment made while computing the book profit u/s 115JB, there are divergent views of the Tribunal on this point. Without going into the controversy of the quantum of adjustment, in view of the finding in respect of disallowance u/s 14A the assessee’s appeal is allowed being consequential;

++ on the issue of the CIT(A) directing the AO to allow the depreciation at Rs. 35,22,140/- after working out the WDV of the assets for earlier years, it is clear that the depreciation has to be allowed on written down value (WDV) after reducing the actual depreciation allowed in the earlier years. In view of the earlier years order of this Tribunal, No substance in the appeal of the revenue