M.S GAURI AVINASH BHOSALE,MUMBAI vs. DY CIT CENTRAL CIRCLE-2(3), MUMBAI

The dispute in the present appeal is confined to disallowance of expenditure under section 14A of the Income Tax Act, 1961, read with rule 8D.

Briefly the facts are, the assessee is an individual. For the assessment year under dispute, the assessee filed his return of income on 28.08.2015 declaring total income of Rs. 1,34,61,140/-. In course of assessment proceedings, the assessing officer (AO) noticed that during the year under 2 Assessment Year: 2015-16 consideration, the assessee had earned exempt income of Rs. 5,26,509/-. Since, the assessee had not disallowed any expenditure attributable to earning of exempt income, the AO called upon the assessee to explain why such expenses should not be disallowed as per rule 8D. In reply, assessee objected to the proposed disallowance by stating that no expenditure has been incurred for earning the exempt income by way of dividend and Provident Fund (PF) interest. The AO however, was not convinced with the submissions of the assessee and proceeded to disallow an amount of Rs. 5,84,461/- under rule 8D(2)(iii) towards administrative expenditure. Though, the assessee contested the aforesaid disallowance before learned Commissioner (Appeals), however, she was unsuccessful.

We have heard the parties and perused the materials on record. The limited submissions made by learned counsel for the assessee before us is, disallowance under rule 8D should be computed by considering only those investments that yielded exempt income during the year. We find substantial merit in the aforesaid submission of the assessee. In case of ACIT vs. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 (Del) (SB), the learned Special Bench of the Tribunal has held that while computing disallowance under section 14A r.w.r. 8D(2)(iii), only those investments which yielded exempt income during the year under consideration can be included in the average value of investment. In view of the ratio laid down by the learned Special Bench, as aforesaid, we direct the AO to compute the disallowance under rule 8D(2)(iii) by considering only those investments which have yielded exempt income during the year.