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Facts
The assessee filed an appeal against the order of the CIT(A) which confirmed the disallowance of Rs. 21,00,000/- under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. The AO had initially made a larger disallowance, which was partly confirmed by the CIT(A).
Held
The Tribunal held that only those investments which yielded exempt income during the year should be considered for computing the average value of investment for the purpose of disallowance under Rule 8D(2)(iii). Since the issue was covered by a Special Bench decision of the ITAT, the AO was directed to recompute the disallowance accordingly.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D(2)(iii) should be computed based on all investments or only those yielding exempt income.
Sections Cited
14A, 8D(2)(iii), 143(3), 92CA
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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
आदेश / O R D E R
PER JAGADISH, A.M : Aforesaid appeal filed by the assessee for Assessment Year (AY) 2011-12 arises out of the order of Learned Commissioner of Income Tax, Appeal, Chennai-16 [hereinafter “CIT(A)”] dated 22.11.2024 in the matter of assessment framed by the Assessing Officer [AO] u/s. 143(3) r.w.s 92CA of the Income-tax Act,1961 (hereinafter “the Act”) dated 31.03.2015.
The groundS of appeal raised by the assessee are as under:
“1. The order of the Commissioner of Income Tax (Appeals), Chennai-16, is contrary to the law, facts and circumstances of the case.
2. Disallowance u/s.14A r.w. Rule 8D: 2.1 The CIT(A) erred in confirming the disallowance u/s.14A r.w. Rule 8D(2)(iii) amounting to Rs.21,00,000/- by taking the total investments as appearing in the balance sheet as against those investments which are capable of earning exempt income. 2.2 The CIT(A) ought to have appreciated that the investments which yielded exempt income during the year was Rs.13,50,74,218. 2.3 The CIT(A) failed to appreciate that in ACIT v Vireet Investments (P) Ltd [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB) it was held that only those investments which yielded exempt income during the year are to be considered for computing average value of investment.
Appellant craves leave to adduce additional grounds at the time of hearing.”
3. The only ground of appeal in this appeal of assessee is against confirming the disallowance u/s. 14A r/w. Rule 8D(2)(iii) of the Income Tax Rules, 1962 (hereinafter “the Rules”) amounting to Rs. 21,00,000/- by taking the total investments as appearing in the balance sheet as against those investments which are capable of earning exempt income. The A.O in the assessment order has made disallowance of Rs. 1,12,08,900/- including the disallowance of Rs. 21,00,000/- under Rule 8D(2)(iii) of the Rules. On appeal, the Ld. CIT(A) confirmed the disallowance made under Rule 8D(2)(iii) of the Rules.
The Ld. Authorized Representative (A.R) of the assessee has submitted that the Special Bench after of ITAT, Delhi in the case of ACIT v. Vireet Investments (P) Ltd., [2017] 82 taxmann.com 415 (Delhi – Trib.) has held that only those investments which yielded exempt income during the year are to be considered for computing average value of investment for the purpose of disallowance under Rule 8D(2)(iii) of the Rules which has not been followed by A.O and Ld. CIT(A) and therefore, the A.O may be directed to compute the disallowance u/s. 14A as per the decision of Hon’ble ITAT, Delhi Benches.
On the other hand, the Ld. Departmental Representative (DR), has relied on the orders of lower authorities and argued that the Rule only prescribes for average value of investment.
We have heard the rival submissions, and perused the materials available on record. The Ld. CIT(A) has confirmed the disallowance of Rs. 21,00,000/- computed under Rule 8D(2)(iii) by the A.O. The Hon’ble Special Bench of ITAT, Delhi in the case of ACIT v. Vireet Investments (P) Ltd., supra, has held that only those investments which yielded exempt income during the year are to be considered for computing average value of investments. However the Ld CIT(A)/AO have computed the disallowances on average value of all the investments. As the issue is covered by the decision of Hon’ble Special Bench decision in the case of ACIT v. Vireet Investments (P) Ltd., the A.O is directed to compute disallowance u/s. 14A r/w. Rule 8D(2)(iii) of the Rules accordingly. In view of the above, the appeal filed by the assessee is allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on 17th April, 2025.