By Jagdish D. Shah
Jagdish T.Punjabi Chartered Accountants
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Section 14A – Investments in wholly owned subsidiaries (WOS) – Before any disallowance can be made the AO must record objectively his satisfaction as regards the expenditure incurred by the assessee – With respect to investment in WOS no expenditure is generally incurred to earn dividend hence no disallowance u/s. 14A
Facts:
The assessee had made investment of Rs. 60.9 crore in the share capital of three wholly owned subsidiary companies. During the year under appeal, the assessee earned dividend income of Rs. 7.52 lakh. Applying the provisions of section 14A read with Rule 8D(2)(iii), the AO disallowed the sum of Rs. 40.31 lakh.
On appeal, the CIT(A) confirmed the order of the AO. Before the Tribunal, the assessee submitted that before applying the provisions of section 14A the Assessing Officer had failed to record objective satisfaction as regards the claims made by the assessee and secondly, the investment made is of long term and of strategic in nature, in the wholly owned subsidiaries. According to it, no decision is required in making the investment or disinvestment on regular basis and, therefore, there cannot be any direct or indirect expenditure.
Held:
The Tribunal agreed with the assessee that recording of objective satisfaction by the AO with regard to the correctness of the claim of the assessee is mandatorily required in terms of section 14A(2) of the Act. It also noted that in the instant case, the AO had simply recorded that the contention of the assessee is not acceptable. Further, it also noted that the entire investment by the assessee was made in the subsidiary companies, therefore, in those cases disallowance u/s. 14A(2) of the Act cannot be worked out unless and until it is established that certain expenditures are incurred by the assessee in these investments. Further, relying on the decisions of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT (I.T.A. No. 1733/PN/2012), of the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT (328 ITR 81) and of the Mumbai Bench of the Tribunal in the case of M/s. JM Financial Limited vs. Addl. CIT, I.T.A. No. 4521/Mum/2012, the Tribunal accepted the submission of the assesse and allowed its appeal.
