2022 (6) TMI 115 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D - restricting the addition under Rule 8D of the Income-tax Rules, 1962 by considering only such investments which yielded tax free dividend income - HELD THAT - As seen that the Hon'ble Delhi High Court in ACB India Ltd. 2015 (4) TMI 224 - DELHI HIGH COURT has held that the average value of investments, for the purposes of Rule 8D(2)(iii), should be confined to those securities in respect of which exempt income is earned and not the total investments. Similar view has been taken by the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI . We set aside the impugned order to this extent and remit the matter to the file of the AO for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investments, in calculating the average value of investments, which yielded exempt income during the year. The assessee will be allowed hearing opportunity in such fresh proceedings. Appeal is partly allowed for statistical purposes.

Summary

Issues:
- Disallowance u/s. 14A of the Income-tax Act, 1961

Analysis:
The appeal before the ITAT Pune concerned the disallowance under section 14A of the Income-tax Act, 1961. The assessee had earned exempt dividend and long-term capital gain amounting to Rs. 89.02 lakh, with Rs. 29,536/- shown as attributable to the exempt income and hence disallowable. The Assessing Officer (AO) calculated the disallowance under Rule 8D at Rs. 10,92,545/-, which was affirmed by the ld. CIT(A).

Upon hearing the rival submissions, the Tribunal focused on the issue of restricting the addition under Rule 8D by considering only investments yielding tax-free dividend income. The Tribunal noted that the Hon'ble Delhi High Court and a Special Bench of the Tribunal had held that the average value of investments for Rule 8D(2)(iii) should be limited to securities generating exempt income. Relying on these precedents, the Tribunal set aside the order and directed the AO to recompute the disallowance under Rule 8D(2)(iii) by including only such investments that yielded exempt income during the year. The assessee was granted a hearing opportunity in the fresh proceedings.

Consequently, the appeal was partly allowed for statistical purposes. The Tribunal's decision emphasized the importance of considering only investments generating exempt income while calculating the average value under Rule 8D(2)(iii), aligning with the precedents set by the Hon'ble Delhi High Court and the Special Bench of the Tribunal. The matter was remitted back to the AO for appropriate re-computation, ensuring a fair assessment of the disallowance under Rule 8D.