The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) deleted a Rs.33.75 Lakh disallowance under Section 14A for exempt dividend income, noting that the investments were made in prior years and the dividend income was passively received.
Ambalal Sarabhai Enterprises Ltd.,appellant-assessee,was involved in manufacturing drugs and pharmaceuticals. It also offered marketing and consultancy services in areas like fine chemicals, industrial glass containers, packing materials, and electronic instruments. The company had 15 divisions, including service units that supported other units within the corporation.
During the assessment, the Assessing Officer ( AO ) noted that the taxpayer claimed dividend income as exempt but failed to provide details on expenses incurred to earn it. The AO stated that even minimal indirect expenses should be apportioned and disallowed. Without direct evidence, the AO made an estimated disallowance of Rs.67,50,000, calculated at 10% of the dividend income.
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During the appeal, the assessee argued that no expenses were incurred to earn the dividend income of Rs.6.75 crores. The assessee explained that the investments were made using internal funds, not borrowed money, and were for business growth, not just to earn dividends.
The income was received passively, with no significant effort required. The assessee also stated that the AO didn’t prove a direct link between any expenses and the exempt income.The Commissioner of Income Tax(Appeals)[CIT(A)] agreed the disallowance was too high and reduced it to Rs.33,75,000 (5% of the total dividend income).
The assessee appealed before the tribunal.
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The two member bench comprising Suchitra Kamble (Judicial Member) and Makarand V.Mahadeokar (Accountant Member) reviewed the case and the arguments from both the assessee and the Revenue. The assessee challenged the disallowance of Rs.33,75,000 under Section 14A, which was upheld by the CIT(A). This amount was 50% of the original disallowance of Rs.67,50,000 made by the AO for expenses related to earning exempt dividend income of Rs.6.75 crores.
The assessee argued that the investments in SPPL were made in earlier years for business reasons, not just to earn dividends. No new investments or additional expenses were incurred during the year. The dividend income was passively received, with no significant effort involved. The assessee’s own funds were more than enough to cover the investment, so no disallowance of interest or other expenses was necessary.
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The AO disallowed Rs.67,50,000 based on the assumption that administrative expenses were incurred. The CIT(A) reduced it to Rs.33,75,000 without providing a clear reason.
The appellate tribunal noted that the investments were made in prior years and that courts have ruled that no disallowance can be made for past investments unless new expenses were incurred in the current year. The dividend income was also passively received, requiring minimal effort.
It stated that disallowance can only happen if there is clear evidence linking expenses to exempt income. Since no such evidence was provided, the tribunal deleted the disallowance.
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