2018 (7) TMI 2130 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - inclusion of investments to be considered for computing average value of investment which yielded exempt income during the year - HELD THAT - This Tribunal is of the considered opinion that only those investments which yielded exempted income alone has to be considered for the purpose of disallowance under Rule 8D(2)(iii). Therefore we are unable to uphold the orders of the authorities below. Accordingly the orders of both the authorities below are set aside and the issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter and restrict the disallowance in respect of such investments which yielded the exempted income and which does not form of total income alone has to be considered for disallowance. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues: Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.

Analysis:
1. The appeal was against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of a specific amount under Section 14A of the Income-tax Act, 1961.

2. The main contention was the interpretation of Rule 8D(2)(iii) of the Income-tax Rules, 1962, which pertains to the calculation of disallowance. The Assessing Officer considered the entire investment for disallowance, even though no income was earned by the assessee. The appellant argued that only investments yielding exempted income should be considered for disallowance, citing a decision of a Special Bench of the Delhi Tribunal.

3. The Tribunal analyzed Rule 8D(2)(iii) and emphasized that the calculation should be based on investments whose income does not form part of the total income. The Tribunal referred to the Special Bench's decision, stating that only investments generating exempted income should be considered for disallowance. The Madras High Court also supported this view, stating that in the absence of exempted income, no disallowance should be made.

4. Consequently, the Tribunal held that only investments generating exempted income should be considered for disallowance under Rule 8D(2)(iii). The orders of the lower authorities were set aside, and the matter was remitted back to the Assessing Officer to re-examine and limit the disallowance to investments yielding exempted income, which does not form part of the total income.

5. The appeal of the assessee was allowed for statistical purposes, and the order was pronounced on 12th July 2018 in Chennai.