Sec 14A cannot be invoked when Investment in the Subsidiaries was shown as Non-Current Assets in the Balance Sheet: ITAT [Read Order]

Income - Investment

Mumbai bench of Income Tax Appellate Tribunal has held that Section 14A of the Income Tax Act 1961 cannot be invoked when investment in the subsidiaries was shown in the balance sheet under the head non-current assets.

Assessee Company in the instant case, duly filed its return of income for the relevant assessment year. During the course of assessment proceedings the Assessing Officer (AO) has found that the assessee company had made certain investment in shares. He was of the view that ordinarily some expenditure would definitely have been incurred for making and maintaining such investments, that the assessee had not worked out any disallowance under section 14A of the act. Accordingly the AO confirmed the disallowance of Rs.1.62 lakhs under section 14A of the Act.

Aggrieved, the assessee approached the tribunal on appeal. Assessee contended that the assessee had not incurred any expenditure for earning tax-free income, that it had made strategic investment only, and during the year under consideration it had not earn any exempt income from the investment, that the investments were made with sole object of controlling group entities, that the administrative and interest expenses were incurred for carrying out its normal business activity, that the no part of expenses could be considered as eligible to earning of exempt income. Hence the AO invoked section 14A by mistake.

After considering the rival submissions of both the parties the tribunal bench comprising of Judicial Member Ravish Sood and Accountant Member Rajendra observed that during the year under consideration, the assessee had not claimed any exempt income and it had not claimed any expenditure for earning exempt income that the AO mentioned above and the AO also ignored the fact that investment in the subsidiaries was shown in the balance sheet under the head non-current assets.

The division bench further observed that for making any disallowance under section 14A read with 8D of the Rules, the AO has to prove two things that the assessee had earned exempt income and that it had claimed certain expenditure against such income which was not offered for taxation. But in the present case, the AO has failed to prove the aforesaid things and in such a situation it is impossible to invoke section 14A of the Act while the assessee has already shown the aforementioned investment in the balance sheet under the head non-current assets.

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