2018 (2) TMI 1581 - AT - Income Tax

Disallowance u/s 14A R.w.r. 8D - Held that - In this case the direct expenditure of ₹ 82,000/-has been admittedly incurred on demat accounts, which is evidently toward earning exempt income. Since in this case exempt income is only of ₹ 10,000/-, applying the decision of the Hon ble Delhi High Court in the case of Joint Investment Private Limited (2015 (3) TMI 155 - DELHI HIGH COURT) would not be appropriate as in that case the assessee itself volunteered for disallowance of ₹ 2, 97, 440/-as attributable under section 14A of the Act, but in the instant case assessee has not attributed any expenses toward earning the exempt income, even the direct expenditure of ₹ 82,000/-on demat accounts Respectfully following the finding of the Tribunal in case of Vireet Investment Private Limited (2017 (6) TMI 1124 - ITAT DELHI), we restore the matter to the file of the Assessing Officer with the direction to consider only the investment which yielded exempt income, for the purpose of average value of investment while computing the disallowance under section 14A of the Act read with Rule 8D of Income-tax Rules, 1962.

Summary

Issues Involved:

1. Legality of the order passed by the Commissioner of Income Tax (Appeals).
2. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.
3. Calculation of disallowance by considering only the average value of investments that yielded exempt income.
4. Exclusion of strategic investments from the disallowance calculation under Section 14A.

Issue-wise Detailed Analysis:

1. Legality of the Order Passed by the Commissioner of Income Tax (Appeals):
The appellant argued that the order passed by the Commissioner of Income Tax (Appeals) was "bad in law, equity and justice." However, the Tribunal did not find any merit in this argument and dismissed this ground as infructuous.

2. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962:
The Assessing Officer (AO) initially disallowed ?5,45,52,862 under Section 14A read with Rule 8D. The Tribunal noted that the AO did not analyze the nature of the expenditure, nor did the assessee provide relevant details of expenditure and accounts. The AO was required to verify the correctness of the assessee's claim that no expenditure was incurred for earning exempt income. The Tribunal restored the issue to the AO for fresh adjudication, directing the AO to pass a speaking order and giving the assessee an opportunity to furnish relevant details.

3. Calculation of Disallowance by Considering Only the Average Value of Investments that Yielded Exempt Income:
The Tribunal referred to the Special Bench decision in the case of Vireet Investment Pvt. Ltd., which held that for the computation of disallowance under Rule 8D(2)(iii), the average value of investments should be limited to only those investments from which the assessee received exempt income. The Tribunal directed the AO to recompute the disallowance by considering only the investments that yielded exempt income, thus allowing the ground No. 2B of the appeal for statistical purposes.

4. Exclusion of Strategic Investments from the Disallowance Calculation under Section 14A:
The appellant argued that strategic investments should be excluded from the disallowance calculation. However, this ground was not pressed by the appellant during the hearing, and therefore, it was not considered by the Tribunal.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to recompute the disallowance under Section 14A by considering only the investments that yielded exempt income. The decision was pronounced in the open court on 31st January 2018.