Kolkata bench of Income Tax Appellate Tribunal (ITAT) held that if a company earned income while making strategic investment in its subsidiary company to control the interest in the company then the deemed income cannot be disallowed.
In this case assessee is a private limited company and engaged in the activity of consultancy engineering. The assessee during the year under consideration besides the income of its consultancy engineering business also earned dividend income for Rs.33,73,356 only which was claimed as exempted under Section 10(34) of the Income Tax Act 1961. The assessee was made a disallowance under section 14A of the act in the light of earlier year disallowance and as per the order of appellate authority.
During the assessment period the Assessing Officer (AO) found certain facts and deficiency with the amount of disallowance made by the assessee in respect of dividend income. He contended that the disallowance was in relation to dividend income which implies that the assessee has incurred the expenses in the connection of dividend income. Further found that there was no justification filed by the assessee for making the disallowance at 10% of the dividend income. The claim of the assessee that disallowance was in line of earlier year disallowance and as per the order of appellate authority cannot be applied to the present facts of the case as Rule 8D of the Income Tax Act. Accordingly, he disallowed the aforesaid amount and added to the total income of assessee.
The division bench consists of Judicial Member S.S.Viswanethra Ravi and Accountant Member Waseem Ahmed observed that while perusing the material facts and records it is clear that the assessee has made strategic investment in its subsidiary company to control the interest in the company and not with the object to earn dividend income and the dividend income is merely incidental from the subsidiary company. Therefore no disallowance of whatsoever can be made in respect of dividend income earned from the subsidiary company.
The bench further stated that while making the disallowance under section 8D(2)(iii) of Income Tax Act in the instant case the dividend income earned from subsidiary company should be excluded for the purpose of disallowance.
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