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2023 (12) TMI 801 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - Calculation by taking into consideration only the investments which have yielded exempt income - as argued CIT(A), instead of adopting the average value of investment of which income is not part of the total income i.e., the value of tax- exempt investment, chose to factor in the total investment itself - Assessee argued investments which are not capable of yielding the dividend income need to be excluded while calculating the exact disallowance under section 14A - HELD THAT - As it is an admitted fact that assessee has earned exempt income of Rs. 3.90 crores. As such, as rightly pointed out by the ld. D.R., the ld. AO has to apply Rule 8D(2)(iii) of the I.T. Rules to compute the disallowance u/s 14A of the Act. However, the investment yielding non-taxable income has to be considered and not all the investment. This proposition has been held correct in the case of ACB India Ltd 2015 (4) TMI 224 - DELHI HIGH COURT had 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. Thus we hold that while calculating disallowance under section 14A of the Act, only investment that have generated exempt income should be taken into consideration. Accordingly, we remit the issue to the file of ld. AO for limited purpose of re- computation of disallowance u/s 14A of the Act r.w. Rule 8D(2)(iii) of the I.T. Rules. It is needless to make it clear that while applying Rule 8D(2)(iii), an amount equal to one half percent of the average of the value of the investment that have generated exempted income should be taken into consideration and not the total investment. Appeal of the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules. 2. Whether disallowance can be made on a notional basis. 3. Consideration of investments yielding non-taxable income for disallowance calculation. 4. Effect of the explanation inserted in Section 14A by Finance Act 2022. Summary: Disallowance under Section 14A read with Rule 8D(2)(iii): The assessee appealed against the NFAC order confirming the disallowance of Rs. 23,73,977/- under Section 14A read with Rule 8D(2)(iii) for the assessment year 2016-17. The assessee received a dividend of Rs. 3.9 crores from GEBE Private Limited, which was claimed as exempt under Section 10(34). The AO applied Rule 8D(2)(iii) and computed the disallowance based on the average value of investments. Disallowance on a Notional Basis: The assessee argued that no expenditure was incurred in earning the exempt income, and the disallowance was made on a presumption without establishing any nexus. The AO's reasoning that investments were made from common pool funds was contested. The assessee cited several judicial precedents, including CIT Vs Syndicate Bank and CIT Vs Reliance Industries Ltd, to support the argument that disallowance under Section 14A requires actual expenditure. Consideration of Investments Yielding Non-Taxable Income: The assessee contended that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii). Judicial precedents, such as ACB India Ltd. v. Astt. CIT and Pr. CIT v. Indiabulls Capital Services Ltd, were cited to support this view. The Tribunal in the assessee's own case for AY 2014-15 had held that only investments generating exempt income should be considered. Effect of Explanation Inserted in Section 14A by Finance Act 2022: The assessee argued that the explanation inserted by Finance Act 2022, which clarifies that disallowance under Section 14A applies even if no exempt income is earned, is prospective and not applicable to the assessment year under consideration. This view was supported by the Delhi High Court in Pr. CIT v. Era Infrastructure (India) Ltd. Tribunal's Decision: The Tribunal held that while calculating disallowance under Section 14A, only investments that have generated exempt income should be considered. The issue was remitted to the AO for re-computation of disallowance as per Rule 8D(2)(iii), considering only the investments that yielded exempt income. The appeal was partly allowed for statistical purposes.
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