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2016 (2) TMI 788 - AT - Income TaxDisallowance u/s 14A - Held that - The third limb of Rule 8D (2), deals with disallowance an amount equal to 1 of the average of the value of investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. The language of this sub-section is very clear to hold that only those investments should be considered under this limb from which exempt income has been earned during the year under consideration by the assessee. The argument raised by the assessee that since there has been no direct or indirect interest expenditure, that could be attributable to the earning of exempt income and therefore, no disallowance could be made u/s 14A r/w 8D of the Act, cannot be accepted. Rule 8D (2)(iii) would be applicable and the disallowance u/s 14A r/w Rule 8D has to be made in accordance to sub section (iii) of section (2) of Rule 8D. We, accordingly, on the basis of the above discussion and findings, set aside this issue to the file of the Assessing Officer for re-computing the disallowance u/s 14A r/w Rule 8D(iii), with a specific direction to consider only those investments from which the assessee has earned tax free income for the year under consideration. It is specifically mentioned that the disallowance has to be made in accordance with law under Rule 8D (2)(iii) for the year under consideration.
Issues:
1. Disallowance under section 14A read with Rule 8D 2. Addition of expenses under "Employee Stock Option cost" 3. Perversity of CIT(A)'s order 4. General grounds of appeal Issue 1: Disallowance under section 14A read with Rule 8D: The Revenue appealed against the CIT(A)'s order restricting the disallowance under section 14A read with Rule 8D to Rs. 35,10,844 from Rs. 1,78,71,632. The assessee argued that it had surplus interest-free funds available for investments in shares and no fresh borrowings were required. The Tribunal noted that Rule 8D applied to the assessee for the assessment year 2009-10. The Tribunal held that while there was no direct or indirect interest expenditure attributable to earning exempt income, the disallowance under Rule 8D(2)(iii) had to be made only for investments generating tax-free income. The Tribunal directed the Assessing Officer to recompute the disallowance accordingly. Issue 2: Addition of expenses under "Employee Stock Option cost": The CIT(A) deleted the addition of Rs. 1,68,10,243 made by the Assessing Officer in respect of expenses debited under "Employee Stock Option cost." The Tribunal upheld this decision based on precedents and the assessee's submissions, dismissing the Revenue's appeal. Issue 3: Perversity of CIT(A)'s order: The Revenue contended that the CIT(A)'s order was perverse and contradictory to CBDT's circular. However, citing precedents and the High Court's decision in the assessee's favor for a previous year, the Tribunal dismissed the Revenue's appeal on these grounds. Issue 4: General grounds of appeal: The Tribunal did not adjudicate on general grounds of appeal, stating they were of a general nature. The Tribunal allowed the Revenue's appeal in part, directing a re-computation of the disallowance under section 14A read with Rule 8D. The order was pronounced on 18/01/2016 by the Tribunal comprising SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER, and SMT. BEENA A. PILLAI, JUDICIAL MEMBER. This detailed analysis covers the key issues raised in the legal judgment before the Appellate Tribunal ITAT DELHI.
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