2018 (12) TMI 1203 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2)(iii) - Held that - Respectfully following the decision of the Special Bench of ITAT Delhi in the case of ACIT Vs. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI we also hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year under consideration for working out the disallowance u/s 14A r.w.r. 8D(2)(iii) in the case on hand. The assessee has submitted that the exempt dividend income of 1 Crore in this year has been earned only from M/s. Embassy Services Pvt. Ltd. Since this judicial pronouncement of the Special Bench of ITAT (supra) was passed subsequent to the passing of order of assessment for Assessment Year 2012-13 we restore this issue to the file of the AO only for the purpose of recomputing the disallowance u/s 14A r.w.r. 8D(2)(iii) of the Rules by restricting the disallowance thereunder i.e. for computing the average value of investments only to those investments which yielded the exempt income earned by the assessee during the year under consideration; as has been held and directed by the ITAT Delhi Special Bench in the case of Vireet Investments (P) Ltd. (supra).

Summary

Issues Involved:
1. Sustaining the addition of ?8,40,705/- under Section 14A of the Income Tax Act.
2. Consideration of only those investments which yielded exempt income for disallowance under Section 14A read with Rule 8D(2)(iii).

Detailed Analysis:

1. Sustaining the Addition of ?8,40,705/- under Section 14A of the Income Tax Act:

The assessee, a company engaged in the real estate business, filed its return of income for the Assessment Year 2012-13 declaring an income of ?4,22,93,828/-. The case was scrutinized, and the assessment was completed under Section 143(3) of the Income Tax Act, 1961, determining the total income at ?4,31,34,533/- after disallowing ?8,40,705/- under Section 14A read with Rule 8D(2)(iii). The disallowance was made in respect of exempt dividend income of ?1 Crore earned by the assessee. The CIT(A) upheld this disallowance. The assessee contended that the dividend was received on one date and credited to the bank account without incurring any expenditure for earning it. The assessee also argued that the disallowance was excessive and unreasonable.

2. Consideration of Only Those Investments Which Yielded Exempt Income for Disallowance Under Section 14A Read with Rule 8D(2)(iii):

The assessee argued that the disallowance under Section 14A read with Rule 8D(2)(iii) should be restricted to only the investments which yielded exempt income during the year. The assessee relied on the decision of the Special Bench of ITAT Delhi in the case of ACIT Vs. Vireet Investments (P) Ltd., where it was held that only those investments which yielded exempt income during the year should be considered for disallowance under Rule 8D(2)(iii). The Tribunal noted that the assessee earned exempt dividend income of ?1 Crore from one company, M/s. Embassy Services Pvt. Ltd., and did not disallow any amount suo moto in its accounts. The Tribunal found merit in the assessee's argument and held that only those investments which yielded exempt income during the year should be considered for computing the average value of investments for disallowance under Rule 8D(2)(iii).

The Tribunal, following the decision of the Special Bench of ITAT Delhi in Vireet Investments (P) Ltd., restored the issue to the file of the Assessing Officer for recomputing the disallowance under Section 14A read with Rule 8D(2)(iii) by restricting the disallowance to the investments which yielded exempt income during the year. Consequently, the assessee's appeal was partly allowed.

Conclusion:

The Tribunal directed the Assessing Officer to recompute the disallowance under Section 14A read with Rule 8D(2)(iii) by considering only the investments which yielded exempt income during the year. The assessee's appeal was partly allowed. The Tribunal's decision was pronounced in the open court on December 13, 2018.