The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that disallowance under Income Tax Act, 1961 cannot be based on presumptions of earning dividend income in future. It was found that the Assessing Officer ( AO ) has proceeded for disallowance made based on presumptions that the investment was made from borrowed funds bearing interest expenditure, which may earn dividend income in the future.
Zodiac Ventures Ltd, the appellant/assessee is in the business of real estate, architectural services, and estate agents. The appellant acquired 5,20,000 shares, equivalent to 50.98% of the total capital of Zodiac Developers Private Ltd., thereby making it a subsidiary. It was submitted that it purchased shares of Zodiac Developers Pvt. Ltd. to acquire controlling interest therein. The investment was made to carry on the business of the subsidiary and not earn a dividend.
During assessment proceedings, the AO observed that the appellant had a non-current investment in the equity shares, out of the total of the assets of Rs. 15,94,58,744 as of 31.3.2016 and Rs. 15,72,01,787 as of 31.03.2015.
The appellant had short-term borrowing of Rs. 3,06,01,355/- as of March 31, 2016, and Rs. 3,31,20,033 as of March 31, 2015. The appellant had debited a finance cost of Rs. 43,65,629/- to the profit and loss account and other expenses of Rs. 27,82,092/-. The revenue of the appellant for FY 2015-16 consisted of the sale of services (the architect and liaison fee) and interest income.
The AO observed that the interest-bearing funds were used to make investments in equity shares. Therefore, not satisfied with the reply of the appellant, the AO calculated Rs 50,81,159 as disallowance under 14A and added back the same to the income of the appellant. The assessee appealed before the CIT (A), and the CIT (A) upheld the AO’s order and dismissed the appeal filed by the assessee.
The appellant/assessee has challenged the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre ( NFAC ), Delhi, under Section 250 of the Income Tax Act, 1961, for the A.Y. 2016–17.
The appellant contended that it had not received any dividend, and therefore there was no question of application of Section 14A. When no exempt income was earned in the financial year 2016, the addition under Section 14A was not permissible. The explanation inserted by the Finance Act, 2022, in Section 14A cannot be applied retrospectively.
As per Section 14A, the expenditure incurred by a taxpayer in relation to income that is not included in the total income as per the provisions of the Act should not be considered a deduction while computing the total income of the taxpayer.
The tribunal noted that the amendment in Section 14A is not applicable retrospectively and further that the assessee has sufficient funds apart from the borrowed amount carrying interest for investment in shares, and as such, the disallowances under Section 14A were not warranted because no exempt income was earned in the previous year relevant for the concerned A.Y. 2016–17.
The two-member bench of Raj Kumar Chauhan (Judicial Member) and Padmavathy S (Accountant Member) has observed that the AO has proceeded for disallowance made based on presumptions that the investment was made from borrowed funds bearing interest expenditure, which may earn dividend income in the future, and the disallowances and additions are permissible under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
The tribunal while allowing the appeal, set aside that the findings recorded by the CIT (A).
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