Computation of Disallowance on Investments under the Income Tax Act

This Income Tax Appellate Tribunal case concerns Rain Industries Ltd. and a disallowance of expenses related to their investments, made under Section 14A of the Income Tax Act. The Assessing Officer disallowed expenses amounting to Rs. 1,86,77,787, arguing that even if exempt income wasn't earned, the disallowance applied. The assessee contested this, stating investments were made from own funds, accumulated profits, and were strategic or acquired under a scheme of arrangement.

IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES “B”: HYDERABAD
(THROUGH VIRTUAL CONFERENCE)

 BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 1843/H/2019
Assessment Year: 2016-17

Rain Industries Ltd.,
Hyderabad.
PAN – AABCP 2276K
(Appellant) 

Vs. 

Dy. Commissioner of
Income-tax,
Circle – 3(1),
Hyderabad.
(Respondent)

Assessee by: Shri Nikhil Kanadia
Revenue by: Shri Rohit Mujumdar

Date of hearing: 10/05/2021
Date of pronouncement: 18/06/2021

O R D E R

PER L.P. SAHU, A.M.:

This appeal filed by the assessee is directed against CIT(A) – 3, Hyderabad’s order dated 14/10/2019 for AY 2016-17 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act” on the following grounds:

“1. The Ld. AO and the Ld. CIT(A) erred in law and in fact invoking and retaining the disallowance u/s 14A of the Act without appreciating the facts of the case

2. The Ld. CIT(A) erred in not adjudicating on the ground that the investments were made out of own funds, while agreeing that the investments were lower than the surplus funds.

3. The Ld. AO and the Ld. CIT(A) failed to appreciate that the investments are strategic and historic and are made out 0 accumulated profits and not out of borrowed funds.

4. Without prejudice to the above, the Ld. AO and the Lc CIT(A) erred in computing the disallowance on th investments which were acquired under a scheme c arrangement.”

2. Brief facts of the case are that the assessee company e-filed its return of income on 28/11/2016 declaring total loss of Rs. 9,92,86,739/-. Subsequently, the case was selected for scrutiny under CASS and accordingly, statutory notices were served upon the assessee, against which, the assessee furnished the information called for.

2.1 The AO noticed from Note 12 to the balance sheet that the assessee company had investments to the tune of Rs. 916,96,51,115/- as on 31 .03.2016 in M/s. Rain Cements ltd (Rs. 212,81,04 ,235/-), M/s. CII Carbon (Vizag) ltd (Rs.1,30,00, 000/-) & M/s. Rain Commodities (USA) Inc. (Rs.702,85,46,880/-). According to the AO, since the assessee had investments, income arising from which is exempt in nature, disallowance u/s. 14A is squarely applicable to assessee's case. He noted that as per the CBDT Circular No. 5/2014 dated 11.02.2014, disallowance of expenditure for earning exempt income u/s. 14A would be attracted even if the corresponding exempt income has not been earned during the financial year. Further, disallowance u/s. 14A was made in assessment u/s. 143(3) for AYs 2014-15 & 2015-16 considering directions of Hon'ble DRP in the case of M/s. Rain Cements ltd for AY 2011-12. Accordingly, he made the disallowance u/s. 14A at Rs.1,86,77,787/-. 

To know more in details find the attachment file