Section14A + Rule 8D Disallowance For Investments Made Out Of Commercial Expediency

 

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The following important judgement is available for download at itatonline.org.

CIT vs. Oriental Structural Engineers Pvt Ltd (Delhi High Court)

S. 14A & Rule 8D: Expenditure on acquiring shares out of "commercial expediency" & to earn taxable income cannot be disallowed

The assessee borrowed funds and invested Rs 6 crore in shares of subsidiary companies. It claimed that the said subsidiaries were Special Purpose Vehicles (SPVs) formed out of "commercial expediency" in order to obtain contracts from the NHAI and that the SPVs so formed engaged the assessee as contractor to execute the works awarded to them (i.e. SPVs) by the NHAI. It was pointed that the turnover from the execution of the contracts was shown in the P&L A/c. It was claimed that the interest attributable to the investments made by the assessee in the SPVs could not be disallowed u/s 14A read with Rule 8D because it could not be termed as expense /interest incurred for earning exempted income. The CIT(A) and Tribunal (order attached) upheld that assessee's claim and held that as the investments in the shares were made out of "commercial expediency" the expenditure incurred for that purpose could not be disallowed u/s 14A and Rule 8D. On appeal by the department to the High Court HELD dismissing the appeal:

This is merely a question of fact and does not involve any question of law much less a substantial question of law, as the Tribunal held that the expenses which have been claimed by the assessee were not towards the exempted income

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