Disallowance u/s 14 A of Income Tax Act not warranted in Absence of Borrowed Fund in Books of Accounts: Delhi HC [Read Order]

The revenue challenged the order passed by the Income Tax Appellate Tribunal about Assessment Year 2012-13.  On advance notice, the respondent/assessee entered an appearance through counsel. 

Whether earning/receipt of income exempt from tax a necessary pre-requisite before making disallowance under Section 14A(1) of the Income Tax Act, 1961? 

The respondent/assessee, M/ S Inductis India Pvt Ltd is a wholly owned subsidiary of ExlService Mauritius Ltd (which in turn is a subsidiary of ExlServices holdings Inc. US) and was engaged in providing IT-enabled back-office research and data analytics services to its associated establishments (AE) and filed its return of income on 29.11.2012 declaring its total income as Rs.16,42,41,218/-.  

The case of the respondent/assessee was selected for scrutiny assessment and notice under Section 143(2) of the Act was issued to it on 08.08.2013, which was followed by notice under Section 142(1) of the Act with a detailed questionnaire dated 06.11.2015, in response whereof the respondent/assessee attended the proceedings whenever called upon to do so.   

On 22.02.2016, the respondent/assessee was called upon to show cause as to why a disallowance under Section 14A of the Act read with Rule 8D of the Rules be not made of the dividend income of Rs.30,15,872/- on which expenses were not declared during the relevant financial year.  The respondent/assessee vide letter dated 29.02.2016 answered that it did not incur any direct or indirect expenditure in making the concerned investment.  

After issuance of show cause notice dated 03.03.2016 to the respondent/assessee qua upward adjustment, the Assessing Officer (AO) passed the Draft Assessment Order dated 14.03.2016, making addition of Rs.13,25,22,487/- to the total income of the respondent/assessee, which amount included a sum of Rs.4,90,839/- towards disallowance under Section 14A of the Act.  

The objections filed by the respondent/assessee before the Dispute Resolution Panel (DRP) were disposed of vide order dated 18.11.2016, wherein the DRP upheld the selection of Accentia Technologies Ltd and TCS E-Serve Ltd as comparables and also held that deferred receivables from AE being an international transaction, the respondent/assessee had failed to establish that adjustment towards overdue receivables was not justified.  On these grounds, the DRP upheld the view of the Assessing Officer and upheld the disallowance of expenses under Section 14A of the Act.  

 A division bench comprising Justice Rajiv Shakdher and Justice Girish Kathpalia the Assessing Officer proceeded on a mere assumption that interest-bearing funds could also have been utilized for investing questions because the respondent/assessee had failed to establish that the source of investments was its funds.

The investments were made in the mutual funds in the ICICI Liquidity Plan wherein the dividend was automatically reinvested with weekly frequency without any efforts to earn dividend income and it did not have any borrowings.

The Tribunal examined the balance sheets of the respondent/assessee from which it came to a definite conclusion that there were no borrowed funds in the books of the respondent/assessee of the relevant year, therefore there was no question of using borrowed funds for investments in mutual funds and consequently, the impugned disallowance under Section 14A of the Act was unwarranted.  

The Court dismissed the appeal since it failed to raise any substantial question of law. 

To Read the full text of the Order CLICK HERE

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