2020 (6) TMI 609 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - As decided in own case 2020 (6) TMI 135 - ITAT BANGALORE Disallowance under section 14A cannot exceed the exempt income earned. Only those investments to be considered for the purpose of disallowance under section 14A which yield tax free income during the year. Where no separate books of accounts are maintained for earning tax free income and taxable income and value of own funds exceed the value of investments, then no disallowance under section 14A is called for. We direct the AO to take into consideration above said binding decision while examining this issue. Accordingly, we restore this issue to the file of the AO for examining it afresh in the light of discussions made supra. Appeal of the assessee is treated as allowed for statistical purposes.

Summary

Issues:
- Correctness of determination of quantum of disallowance under section 14A of the Income-tax Act, 1961 r.w. Rule 8D of the Income-tax Rules, 1962.

Analysis:
1. The appeal pertains to the correctness of the disallowance made by the revenue authorities under section 14A of the Income-tax Act, 1961, along with Rule 8D of the Income-tax Rules, 1962, for the assessment year 2011-12.

2. The primary contention raised by the assessee was regarding the disallowance amount confirmed by the CIT(A) under section 14A read with Rule 8D, which amounted to ?28,44,12,626. The appellant argued that the disallowance should not exceed the actual exempt income earned during the year, which was ?57,04,390, emphasizing that only investments yielding tax-free income should be considered for disallowance purposes.

3. Furthermore, the appellant challenged the CIT(A)'s decision on the grounds that no disallowance under section 14A should be made when the assessee's own funds substantially exceed the exempt income yielding assets. The appellant also contested the inclusion of interest and other costs for disallowance purposes, advocating for the exclusion of interest on specific term loans and borrowed funds utilized for distinct purposes.

4. The Tribunal considered the arguments presented by the appellant and referred to a previous decision in the assessee's case for the assessment year 2012-13. The Tribunal highlighted that disallowance under section 14A should not surpass the exempt income earned, and only investments generating tax-free income should be relevant for disallowance calculations.

5. The Tribunal directed the Assessing Officer to re-examine the issue in light of the contentions raised, emphasizing that if the own funds of the assessee exceed the value of investments, no disallowance under Rule 8D(2)(ii) is warranted. Additionally, the Tribunal instructed the AO to exclude investments not yielding exempt income while computing the average value of investments, in line with established legal precedents.

6. In conclusion, the Tribunal allowed the appeal for statistical purposes and instructed the AO to reconsider the disallowance issue in accordance with the principles outlined during the proceedings. The decision was pronounced on June 24, 2020, by the Vice President and Accountant Member of the Appellate Tribunal ITAT Bangalore.