CBDT to reopen cases on group investments

Field formations may re-examine cases from 1997.

The Central Board of Direct Taxes (CBDT) has asked its field formations to reopen all cases in which companies have invested in subsidiaries or group companies and claimed deduction on expenses like interest outgo on funds they borrowed for such investments.

Tax department officials said chief commissioners had been asked to look into cases dating back to 1997, when section 14A was inserted into the Income Tax Act.

The section provides that no deduction will be allowed for expenditure incurred in relation to income that does not form part of total income. Dividend income is exempt from tax and enjoys a different tax treatment under the head of investments in company balance sheets.

Officials added that in many cases, companies were claiming deductions on interest they paid on grounds that they had borrowed funds and invested in group companies or subsidiaries. The interest outgo was deducted from the income these companies earned.

The reopening of the cases with retrospective effect will be done under section 150 of the Income Tax Act, sources said.

The department may also look at returns filed as far back as 1962, based on scrutiny of tax returns.

The move follows a judgement by the Mumbai Income Tax Tribunal in late October that disallowed any expenditure that does not form part of the taxable income, which are primarily expenses towards dividend income, in the cases of Daga Capital Management, Maxopp Investments and Cheminvest Ltd. The judgement is based on section 14A of the Income Tax Act.

The tribunal was of the view that assessees got tax exemption on dividend income and also claimed deduction of expenses incurred towards such investment from the taxable income. This, it said, is against the basic principle of taxation.

The department has also advised the income tax tribunals to return pending appeals on such cases to rework the taxable income component.

To reopen cases with retrospective effect, the tax authorities are reworking the taxable income and segregating the expenses towards taxable and non-taxable or dividend income based on the formula prescribed under Section 8D. This formula was inserted in the Finance Act, 2008, and is applicable retrospectively from 1962.

Tax department officials said the move will impact all companies that make investments in their own group companies to maintain control besides making general investment in mutual funds, shares, debentures or securities.

Since a large number of companies follow a similar strategy, officials said the government could rake in upwards of Rs 20,000 crore through reworking the taxable income. “Even if companies appeal to higher courts, the amount will be first deposited with the revenue department and depending on the outcome of the appeals, the amount could be refunded,” an official said.

The move comes at a time when tax collections have been impacted by the slowdown.