2022 (1) TMI 333 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Inclusion/exclusion of investments which could yield dividend - whether AO is justified in considering the entire investment for the purpose of computing the disallowance u/r 8D(2)(iii) or he should have considered only such investments as yielded dividend as pleaded by the assessee? - HELD THAT - The assessee has been dealing with the government securities markets including treasury Bills and other debt instruments like PSU Bonds, interest Rate Derivatives and other money market instruments. It has been the case of the assessee that the dividend yielding securities were purchased in the regular course of business without any further efforts. No direct expenses were said to have been incurred by the assessee in dealing with the shares for the purpose of earning dividend nor any interest component is involved in dealing with such shares which are admittedly stock-in-trade. As held by the ld. CIT(A), this issue is no longer res integra and is squarely covered by the decision of Hon ble jurisdictional High court in the case of Acb India Ltd. 2015 (4) TMI 224 - DELHI HIGH COURT wherein it is held that while calculating the disallowance u/s. 14A read with Rule 8D(2)(iii) only those investments which could yield dividend should be taken into account and not those investment which could not earn any dividend during the year. Mere fact that the assessee received the dividend has no role to play in computing the disallowance u/s. 14A read with Rule 8D except to limit the disallowance to the quantum of dividend - we find the grounds of appeal of the Revenue to be devoid of merits and accordingly, the same are dismissed. Consequently, the appeal of the Revenue is liable to be dismissed.

Summary

Issues:
1. Disallowance of expenses under section 14A of the Income-tax Act, 1961.
2. Consideration of entire investment for computing disallowance u/r 8D(2)(iii) or only dividend-yielding investments.

Analysis:
1. The case involved an appeal by the Revenue against the assessment order passed by the Commissioner of Income Tax (Appeals) concerning disallowance of expenses under section 14A of the Income-tax Act, 1961. The assessee, a subsidiary of Punjab National Bank, was engaged in trading government securities and claimed that no expenditure was incurred in relation to exempt income. The assessee argued that no additional efforts were made to earn tax-free income as it was generated from stock in trade procured in the normal course of business. The assessee computed a disallowance under section 14A read with Rule 8D(2)(iii) at 0.5% of the average value of investments. The Commissioner of Income Tax (Appeals) accepted the assessee's contention based on a decision of the Delhi High Court, limiting the disallowable part to a specific amount.

2. The main issue in this case was whether the Assessing Officer was justified in considering the entire investment for computing the disallowance under rule 8D(2)(iii) or if only dividend-yielding investments should be taken into account. The Tribunal referred to a decision of the jurisdictional High Court, which held that only investments capable of yielding dividends should be considered for such disallowances. The Tribunal upheld the Commissioner's decision, stating that the issue was settled law and the findings were in line with the High Court's ruling. The Tribunal emphasized that the receipt of dividends by the assessee did not impact the computation of disallowance under section 14A read with Rule 8D, except to limit the disallowance to the amount of dividend received.

In conclusion, the Tribunal dismissed the Revenue's appeal, stating that the grounds lacked merit as the Commissioner's decision was in accordance with established legal principles. The appeal was therefore dismissed, affirming the decision regarding the disallowance of expenses under section 14A of the Income-tax Act, 1961.