2017 (12) TMI 1551 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D(2)(iii)- Held that - As relying on ACIT v. Vireet Investments Private Limited 2017 (6) TMI 1124 - ITAT DELHI only those investments are to be considered for computing average value of investments which yielded exempt income during the year. Therefore, respectfully following the said decision, we direct the Assessing Officer to compute the disallowance under Rule 8D(2)(iii) by considering only those investments which yielded exempt income during the year and recompute the income accordingly.- Appeals of the assessee are partly allowed.

Summary

Issues:
Disallowance under Rule 8D(2)(iii) for Assessment Years 2011-12 and 2010-11.

Analysis:
The appeals were filed against the orders of the Commissioner of Income Tax (Appeals) confirming the disallowance under Rule 8D(2)(iii). The assessee contended that only investments yielding dividend income should be considered for computing the disallowance, citing the decision of the Delhi Special Bench of ITAT in a specific case. The Departmental Representative (DR) supported the lower authorities' orders. The Tribunal considered the decision of the Special Bench and directed the Assessing Officer to compute the disallowance by considering only investments yielding exempt income during the year. The Tribunal emphasized that only investments yielding dividend income should be considered for disallowance under Rule 8D(2)(iii), rendering other contentions raised by the assessee irrelevant. The assessee's appeals were partly allowed based on this determination.

This judgment primarily revolves around the interpretation of Rule 8D(2)(iii) for the computation of disallowance. The key issue was whether all investments or only those yielding exempt income should be considered for the disallowance. The Tribunal's decision to follow the Special Bench's ruling clarified that only investments yielding exempt income, specifically dividend income, are relevant for the computation. This interpretation provides a clear guideline for future cases involving similar disallowances under Rule 8D(2)(iii).

The assessee's argument, supported by a specific case law, emphasized the importance of considering only investments yielding dividend income for the disallowance calculation. This contention, coupled with the Tribunal's reliance on the Special Bench's decision, formed the basis for allowing the appeals in part. By focusing on investments generating exempt income, particularly dividend income, the Tribunal ensured a more precise and consistent application of Rule 8D(2)(iii) in this case.

The Tribunal's decision to direct the Assessing Officer to recompute the disallowance based on investments yielding exempt income aligns with the principle of fairness and proper application of tax laws. By providing the assessee with an opportunity to be heard during the reassessment process, the Tribunal upheld procedural fairness while emphasizing the specific criteria for considering investments in the disallowance calculation. This approach promotes transparency and accuracy in determining the disallowance under Rule 8D(2)(iii) for future assessments.