No disallowance of expenditure u/s 14A of Income Tax Act in absence of dividend Income from investments in equities: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai bench held that there shall be no disallowance of expenditure under section 14A of Income Tax Act, 1961 in absence of dividend Income from the investments in equities.

Assessee, Emerson Electric Company (India) Pvt. Ltd.  is engaged in the business of developing and exporting software, providing engineering services and IT enabled services, and manufacturing of horns and electric motors for elevator application. After filing return of Income the assessee’s case was selected for scrutiny

During the assessment proceedings, it was observed that the assessee has its investments in equities where returns from investments are in the nature of dividends, which is an exempt income.

It was observed by the AO that though the assessee has not earned any exempt income from such dividends, it remains a fact that such investments are long-term investments and the basic purpose of equity investments is to increase the stake in companies and therefore being claimant of the profits of the said companies by way of dividends.

Accordingly AO computed the disallowance of Rs.75,18,750, under section 14A read with Rule 8D.

Aggrieved by the order, the assessee filed an objection  before the Dispute Resolution Panel (DRP), who rejected the objections of assessee. Therefore the assessee filed another appeal before the tribunal.

Before the bench, counsel for the assessee submitted that the has not earned any dividend income.Thus without earning dividend income disallowance of expenditure under Section 14A of Income Tax Act should not be made.

Counsel for the revenue argued that equity investments made by the assessee being long-term investments, they did not necessarily result in dividend every year.

The tribunal, during the proceedings relied upon the decision of Delhi High Court in Cheminvest Ltd. v. CIT and observed that Section 14A of Income Tax Act would  not apply if no exempt income is received or receivable during the relevant previous year.

Further the tribunal verifying the amendment by the Finance Act, 2022  in the section 14A of the Act observed that the amendment is prospective in nature thus disallowance under section 14 A Of the  Income Tax Act  read with Rule 8D is not permissible .

Hence the two member bench of S. Rifaur Rahman (Accountant Member) and Sandeep Singh Karhail (Judicial Member) directed to deleted disallowance computed under Section 14A read with Rule 8D in the absence of dividend Income from investments in equities.

Dinesh Bafna, Appeared for the assessee and R.S. Srivastav appeared for revenue

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