2021 (3) TMI 653 - AT - Income Tax

Disallowance u/s 14A r.w Rule 8D(2)(ii) - HELD THAT - When the disallowance under Sec. 14A r.w Rule 8D(2)(iii), as claimed by the assessee, is found to be lower than the amount of the exempt income that was received by it during the year in question, the disallowance under the aforesaid statutory provision was liable to be restricted only to the extent the same was computed under Sec. 14A r.w Rule 8D(2)(iii). In our considered view, the intent of the first appellate authority to restrict the disallowance under Sec.14A to the extent the same is worked out u/rule 8D(2)(iii), subject to an upper limit i.e the amount of the exempt dividend income that was earned by the assessee during the year in question can safely be gathered from a conjoint perusal of his observations recorded in the appellate order. Be that as it may, in order to dispel any doubts, we herein direct the A.O to restrict the disallowance under Sec. 14A r.w Rule 8D to the extent the same is worked out u/rule 8D(2)(iii) i.e after excluding the investments that had not yielded any exempt income during the year in question, as directed by the CIT(A), subject to an upper limit as that of the exempt dividend income that was earned by the assessee during the year in question. Disallowance computed under Sec. 14A r.w Rule 8D to be added to the book profit under Sec. 115JB - HELD THAT - As observed by the CIT(A), the Special bench of the ITAT Dehli in the case of ACIT Anr. Vs. Vireet Investments Pvt. Limited Anr 2017 (6) TMI 1124 - ITAT DELHI had clearly observed that for the purpose of computing the average value of investments within the meaning of Rule 8D(2)(iii) the investments which had not yielded any exempt income during the year are liable to be excluded. Also, the Special bench of the Tribunal had observed, that computation under clause (f) of Explanation 1 to Sec.115JB(2) is to be made without resorting to the computation contemplated under Sec. 14A r.w Rule 8D of the Income Tax Rules,1962. Accordingly, finding no infirmity in the view taken by the CIT(A) w.r.t the aforesaid two issues on the basis of which his order has been assailed by the revenue before us, we, thus uphold the same.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the Income-Tax Rules, 1962.
2. Methodology for quantifying disallowance under Section 14A.
3. Addition of disallowance to book profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

Disallowance under Section 14A:
The assessee challenged the disallowance of ?1,88,58,934/- made by the Assessing Officer (A.O) under Section 14A read with Rule 8D(2)(iii) of the Income-Tax Rules, 1962. The A.O had worked out the disallowance at ?24,34,11,363/- based on the proportion of investments made in exempt income-yielding shares. The CIT(A) observed that disallowance under Section 14A read with Rule 8D should be made only in respect of investments that yielded exempt income during the year and that no disallowance of interest expenditure was warranted given the availability of self-owned funds. Consequently, the CIT(A) restricted the disallowance to the extent of exempt income earned by the assessee, i.e., ?1,88,58,934/-.

The assessee contended that the disallowance under Rule 8D(2)(iii) should be based on investments yielding exempt income during the year and should be restricted to the exempt income if it exceeds the computed disallowance. The Tribunal found substantial force in the assessee's claim and directed the A.O to restrict the disallowance under Section 14A read with Rule 8D to the extent worked out under Rule 8D(2)(iii), excluding investments that did not yield exempt income, subject to an upper limit of the exempt income earned during the year.

Methodology for Quantifying Disallowance:
The revenue's appeal contended that the CIT(A) erred in deviating from the prescribed methodology under Rule 8D and excluding investments that did not yield exempt income while computing disallowance. The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench of the ITAT Delhi in ACIT & Anr. Vs. Vireet Investments Pvt. Limited & Anr., which stated that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii).

Addition to Book Profit under Section 115JB:
The revenue also challenged the CIT(A)'s decision that the disallowance computed under Section 14A read with Rule 8D was not required to be added to the book profit under Section 115JB. The Tribunal upheld the CIT(A)'s view, citing the Special Bench of the ITAT Delhi in Vireet Investments Pvt. Limited, which clarified that the computation under clause (f) of Explanation 1 to Section 115JB(2) should be made without resorting to the computation under Section 14A read with Rule 8D.

Conclusion:
- The appeal of the assessee was allowed, directing the A.O to restrict the disallowance under Section 14A read with Rule 8D to the extent computed under Rule 8D(2)(iii), excluding non-income yielding investments, subject to an upper limit of the exempt income earned.
- The revenue's appeal was dismissed, affirming the CIT(A)'s methodology for disallowance computation and the exclusion of such disallowance from book profit under Section 115JB.