Foreign Dividend Income Which is Chargeable to Tax is outside the provision of 14 A: ITAT rules in favour of Tata Industries [Read Order]

In a significant case of Tata Industries, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that foreign dividend income which is chargeable to tax is outside the provision of 14 A of the Income Tax Act,1961.

The revenue challenged the order of CIT(A) about the disallowance u/s 14A of the Act both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Income Tax Act. 

The assessee company is engaged in the business of providing business investment and finance and promotion of new companies in various fields to their customers.  The assessee company received dividend income from subsidiaries and others amounting to Rs 118.39 crores and the exemption claimed u/s 10(34) of the Income Tax Act was for Rs 41.56 crores. The assessee made suo moto disallowance of expenses u/s 14A of the Act in the return of income to the tune of Rs 3,47,57,769/-.

The AO disallowed Rs 7,69,70,580/- u/s 14A of the Income Tax  Act under normal provisions of the Act and added back Rs 11,14,51,688/- in terms of clause ‘f’ of Explanation 1 to section 115JB(2) of the Act.  On appeal, the CIT(A) directed the AO to rework the disallowance u/s 14A of the Act read with Rule 8D of the Rules by excluding the value of such investments where the dividend received thereon is chargeable to tax and by excluding the value of investments on which dividend income has not been received by the assessee company during the year under consideration, as far as disallowance under normal provisions of the Act.  

It was viewed that the investments made in subsidiary companies to hold dominant control over the same or for strategic investments would also have to be considered for working out the disallowance u/s 14A of the Income Tax Act in the light of the decision of the Supreme Court in the case of Maxopp Investments reported in 402 ITR 640(SC).  

The foreign dividend income which is chargeable to tax would be outside the purview of the application of provisions of section 14A of the Income Tax Act. The Tribunal observed that the CIT(A) had merely directed the AO to exclude the investments which had yielded taxable income and to include only those investments which had yielded exempt income. 

A Coram comprising of Shri M Balaganesh, Accountant Member & Shri Rahul Chaudhary, Judicial Member held that “the actual expenses incurred by the assessee thereon would have to be considered in clause ‘f’ which has already been done by the assessee while computing book profits u/s 115JB of the Income Tax Act. Hence the directions of the CIT(A) are modified accordingly.”The appeal of the revenue was partly allowed. 

To Read the full text of the Order CLICK HERE

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