2019 (5) TMI 1379 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - Appellant Company has suo motto disallowed towards such expenditure - Whether while computing the disallowance under section 14A rule 8D2(iii) of the Act, only those investments are required to be included for the purpose of calculating the average investments which yield exempt income during the year? - HELD THAT - We find merit in the submissions of the Ld. A.R. and that only those investments yielding exempt income has to be considered for calculating the average investments. The issue is squarely covered by the decision of Tribunal in the case of ACIT vs. Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI wherein it has been held that only those investments are to be considered for computing average value of investments which yielded exempt income during the year. We, therefore, respectfully following the co-ordinate bench of the Tribunal, direct the AO to compute the disallowance after taking into account only those investments which yielded exempt income and for the purpose of average investment.

Summary

Issues:
- Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962
- Consideration of investments yielding exempt income for computing average value of investments

Analysis:
1. The appellant challenged the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of ?17.18.351 under Section 14A of the Income-tax Act, 1961. The appellant had already made a suo-moto disallowance of ?32.099 towards such expenditure. The first ground raised was regarding the confirmation of the Assessing Officer's disallowance, and the second ground was about the strategic investments made by the appellant company that should have been excluded while computing the disallowance. The third ground emphasized that only investments yielding dividend income during the year should be considered for calculating the average value of investments.

2. The second ground raised by the appellant was not pressed during the hearing and was subsequently dismissed. The main issue for adjudication was the disallowance under section 14A of the Act read with rule 8D of the Rules, specifically focusing on the consideration of investments yielding exempt income for computing the average value of investments and consequent disallowance.

3. The appellant had earned exempt income through dividends and had made a suo-moto disallowance under section 14A without applying rule 8D(2). The Assessing Officer invoked rule 8D(2) to compute the disallowance, resulting in a net addition to the appellant's income. The Tribunal observed that only investments yielding exempt income should be considered for calculating the average investments, as per the decision in the case of ACIT vs. Vireet Investments. Therefore, the Tribunal directed the Assessing Officer to compute the disallowance by considering only those investments that yielded exempt income for the purpose of average investment.

4. After considering the submissions and the legal precedent, the Tribunal allowed ground No.3 raised by the appellant, partially allowing the appeal. The judgment clarified the correct approach to be followed while calculating the disallowance under section 14A, emphasizing the importance of including only those investments that yield exempt income for determining the average value of investments.