2023 (9) TMI 108 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - action of the AO and the CIT(A) in considering the average investment value under Rule 8D(2)(iii) of the Rules - HELD THAT - We are of the view that only investment yielding non-taxable income has to be considered and not all the investments. This proposition has been held correct in the case of ACB India Ltd., 2015 (4) TMI 224 - DELHI HIGH COURT as held that for the purpose of section 14A, instead of taking into account total investment, the investment attributable to dividend (exempt income) was only required to be adopted and thereafter the disallowance was to be arrived. We hold that while calculating disallowance u/s 14A of the Act, only investment that have generated exempt income should be taken into consideration. See M/S INDIABULLS CAPITAL SERVICES LTD. 2019 (10) TMI 30 - SC ORDER - Decided in favour of assessee.

Summary

Issues:
The solitary issue raised is whether CIT(A) is justified in confirming the addition made by the AO amounting to Rs. 4,69,055/- under section 14A of the Act.

Brief facts:
The assessee, a public sector undertaking, filed a return of income for Assessment Year 2014-15, initially declaring total income of Rs. 8,44,17,38,820/-. After scrutiny, a revised return was filed with income declared as Rs. 8,43,74,17,120/-. The AO made an additional disallowance of Rs. 4,69,055/- under section 14A r.w.r. 8D of the Income Tax Rules, 1962, after adjusting voluntary disallowance of Rs. 1,30,000/- by the assessee.

First Appellate Authority:
The CIT(A) upheld the disallowance made by the AO under section 14A of the Act.

Tribunal's Decision:
The assessee appealed before the Tribunal, arguing that only dividend earning investments should be considered in calculating the average investment value under Rule 8D(2)(iii) of the Rules, citing a judgment of the Hon'ble Delhi High Court. The Tribunal agreed with this argument, emphasizing that only investments generating exempt income should be taken into account for disallowance under section 14A. Referring to previous judicial pronouncements, the Tribunal held that the disallowance should be based on investments that have generated exempt income. Additionally, the Tribunal noted that the explanation inserted by Finance Act, 2022, was held to be prospective by the Hon'ble Delhi High Court in a separate case. Consequently, the Tribunal deleted the disallowance made under section 14A of the Act, amounting to Rs. 4,69,055/-, and allowed the appeal filed by the assessee.