2017 (4) TMI 232 - AT - Income Tax

Addition u/s 14A - Held that - We direct the Assessing Officer to recalculate the disallowance as per rule 8D as per the guidelines given as above in the case of Transport Corporation of India and calculate the disallowance of expenditure under rule 8D(2)(iii) taking the average investment from which the exempt income is received.

Summary

Issues Involved:
- Disallowance under section 14A of the Income-tax Act
- Invocation of rule 8D of the Income-tax Rules for disallowance
- Correct calculation of disallowance amount
- Compliance with the procedure laid down under rule 8D

Analysis:

1. Disallowance under Section 14A:
The assessee appealed against the orders of the Commissioner of Income-tax (Appeals) for the assessment years 2009-10 and 2012-13, challenging the disallowance under section 14A of the Income-tax Act. The Assessing Officer had disallowed an amount under section 14A as the assessee received dividend on units of mutual funds claimed as exempt income without corresponding expenditure disallowance. The contention was that no nexus existed between the investment in funds yielding exempted income and any expenditure.

2. Invocation of Rule 8D for Disallowance:
The Assessing Officer invoked rule 8D of the Income-tax Rules to calculate the disallowance amount. The rule prescribed a methodology for determining the disallowance under section 14A. The Commissioner of Income-tax (Appeals) upheld the action of the Assessing Officer, confirming the disallowance restricted to 0.5 per cent of the average value of investments as per rule 8D(2)(iii).

3. Correct Calculation of Disallowance Amount:
The assessee argued that the Assessing Officer incorrectly calculated the disallowance amount under rule 8D by considering the total investment instead of investments generating income. The Tribunal referred to a similar case where it was clarified that investments generating exempt income should be included in the calculation, while those not generating such income should be excluded. The Tribunal directed the Assessing Officer to recalculate the disallowance under rule 8D, considering investments from which the exempt income was received.

4. Compliance with Rule 8D Procedure:
The Tribunal, based on the precedent, directed the Assessing Officer to recalculate the disallowance in compliance with the guidelines provided in a previous case. The order allowed the appeals, emphasizing the correct calculation methodology under rule 8D for determining the disallowance of expenditure. The Tribunal's decision aligned with the interpretation of rule 8D to ensure accurate computation of disallowance under section 14A.

In conclusion, the Tribunal's judgment addressed the issues of disallowance under section 14A, invocation of rule 8D for calculation, ensuring the correct methodology for determining the disallowance amount, and compliance with the procedural guidelines under rule 8D. The decision provided clarity on the nexus between exempt income and expenditure, emphasizing the accurate inclusion of investments generating exempt income in the calculation process.