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2022 (3) TMI 25 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - disallowance of the expenditure incurred for earning of the exempt income - HELD THAT - We concur with the claim of the Ld. learned Authorized Representative for the assessee that no part of interest expenditure was liable to be disallowed in the hands of the assessee company. We, thus, in terms of our aforesaid observations vacate the disallowance of interest expenditure of ₹ 890,454/- made by the AO u/s.14A r.w.r.8D(2)(ii). Disallowance of the administrative expenses - AO by triggering the mechanism contemplated under Rule 8D(2)(iii) of the Income-tax Rules, 1962, we are of the considered view, that as stated by the ld. A.R, and rightly so, for the purpose of computing the disallowance of the administrative expenses the average value of investment has to be computed by considering only those investments which had yielded exempt income during the year under consideration. Our aforesaid conviction is fortified by the order of the Income-tax Appellate Tribunal, Special Bench, Delhi in the case of ACIT Vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein the Tribunal had held that for the purpose of computing the disallowance of the administrative expenses under Rule 8D(2)(iii) of the Income-tax Rules, 1962, only those investment have to be considered for computing the average value of investments which had yielded exempt income during the year under consideration - we herein direct the AO to rework out the disallowance of the administrative expenses u/s.14A r.w Rule 8D(2)(iii) by determining the average value of investments after considering only those investments that had yielded exempt income during the year under consideration. The Ground of appeal No.1 is allowed
Issues Involved:
1. Disallowance of ?9,64,389/- on account of inadmissible expenses under Section 14A read with Rule 8D. 2. Disallowance of ?1,00,000/- out of Traveling & Conveyance expenses (not pressed by the assessee). Detailed Analysis: Issue 1: Disallowance of ?9,64,389/- on account of inadmissible expenses under Section 14A read with Rule 8D The assessee filed its return of income for the assessment year 2012-13, declaring a total income of ?2,80,47,160/-. During the scrutiny assessment, the Assessing Officer (A.O) observed that the assessee had invested ?1,50,10,109/- in shares of various companies. The A.O questioned the assessee on the expenditure incurred for earning exempt income and proposed a disallowance under Section 14A of the Income-tax Act, 1961, invoking Rule 8D of the Income Tax Rules, 1962. The assessee contended that no disallowance was warranted as the investments were made from self-owned/interest-free funds. However, the A.O was not convinced and made a disallowance of ?9,64,389/-. On appeal, the CIT (Appeals) upheld the A.O's disallowance, noting that the assessee failed to provide its balance sheet to substantiate the claim that investments were made from self-owned funds. Before the ITAT, the assessee argued that it had sufficient self-owned/interest-free funds amounting to ?23,78,16,054/- (share capital and reserves) against the investment of ?1,50,10,109/- in exempt income yielding shares. The assessee relied on the Supreme Court judgment in the case of South Indian Bank Limited Vs. CIT, which held that if interest-free funds are sufficient to cover the investments, it should be presumed that investments were made from such funds. The ITAT found merit in the assessee's contention, noting that the assessee had sufficient self-owned/interest-free funds and thus, no part of the interest expenditure was liable to be disallowed under Section 14A read with Rule 8D(2)(ii). Regarding the disallowance of administrative expenses under Rule 8D(2)(iii), the ITAT held that only those investments which yielded exempt income during the year should be considered for computing the "average value of investments." This view was supported by the Special Bench of the ITAT, Delhi in the case of ACIT Vs. Vireet Investment Pvt. Ltd. Consequently, the ITAT directed the A.O to rework the disallowance of administrative expenses accordingly. Issue 2: Disallowance of ?1,00,000/- out of Traveling & Conveyance expenses The assessee did not press this ground of appeal. Accordingly, the ITAT dismissed this ground as not pressed. Conclusion: The ITAT allowed the appeal of the assessee in part, vacating the disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii) and directing the A.O to rework the disallowance of administrative expenses under Rule 8D(2)(iii) by considering only those investments that yielded exempt income during the year. The appeal was allowed in terms of these observations.
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