Disallowance under section 14A on substantial dividend income earned with investment value increase due to fair value arising out of amalgamation

Facts:

Assessee filed NIL return due to carry forward of losses of Rs. 85.96 crores. It was noticed by the AO that they were in receipt of dividend income of Rs. 48.28 crores which was claimed exempt under section 10(34). It was also found out that interest payment of Rs. 84.05 crores was paid of which assessee had voluntarily offered disallowance of Rs. 8.21 crores under section 14A (0.5% of the investment of 1643.08 crores). The AO computed the disallowance under section 14A read with rule 8D at 80.08 crores based on the entire investment in the books of the assessee. This disallowance was upheld by the CIT(A). On higher appeal the plea of the assessee was; vide a court amalgamation of Essel business process Ltd. the shares of Zee Entertainment Enterprises Ltd. (Zee) came to assessee's investment kitty. As part of this amalgamation the fair valuation these shares of Zee was recorded at 1466.6093 crores. Thus there was no investment which was acquired by the assessee in the first place. Accordingly the addition made by the AO under section 14A ought to be dismissed.  

Held in favour of the assessee that the disallowance of the AO was erroneous and the computation of the assessee under section 14A read with rule 8D was correct.

Ed. Note: The merger of Zee and Sony is coming at the right time giving breather to Zee and its group companies to lessen their overladen debt. In the filings with stock exchange of Zee merger with Sony, Cyquator (assessee) is shown as a promoter controlled entity shareholder.

Case: Cyquator Media Services (P) Ltd. v. Dy. CIT 2023 TaxPub(DT) 4403 (Mum-Trib)