ITAT Delhi directs exclusion of non-yielding investments for disallowance under Rule 8D(2)(iii)

The appeal was allowed for statistical purposes by the ITAT Delhi on February 6, 2015. The Tribunal directed the Assessing Officer to exclude investments yielding no income for the current assessment year from the average investment for computing disallowance under Rule 8D(2)(iii) of the IT Rules. The decision was based on precedents indicating that if no exempt income was earned during the year, disallowance could not be made under Section 14A of the Act.

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Issues Involved:
- Disallowance of expenses for earning Dividend Income
- Inclusion of investments yielding no income for disallowance under Rule 8D(2)(iii)

Analysis:

Issue 1: Disallowance of expenses for earning Dividend Income
The appeal was against the order of the CIT(A) dated 10.06.2013 regarding disallowance of expenses for earning Dividend Income. The Assessing Officer had disallowed an amount under Rule 8D of IT Rules, which was contested by the assessee. The CIT(A) affirmed the assessment order but directed the exclusion of a specific sum related to mutual funds. The assessee contended that investments not yielding income should be excluded for disallowance under Rule 8D(2)(iii). The assessee cited various judicial precedents supporting this argument. The Tribunal noted that the Hon'ble Delhi High Court and the Chennai Bench of the ITAT had held that if no exempt income was earned during the year, disallowance could not be made under Section 14A of the Act. The Tribunal directed the AO to exclude investments with no income for the current assessment year from the average investment for computing disallowance under Rule 8D(2)(iii).

Issue 2: Inclusion of investments yielding no income for disallowance under Rule 8D(2)(iii)
The dispute revolved around the computation of disallowance under Rule 8D(2)(iii) of the IT Rules. The assessee argued that investments not generating dividends should be excluded from the average investment for disallowance calculation. The Tribunal referred to jurisdictional precedents to support this argument. The Chennai Bench of the ITAT emphasized that disallowance under Section 14A read with Rule 8D should consider investments giving rise to income not forming part of the total income. The Tribunal directed the AO to recompute the disallowance by excluding investments without dividend/income for the current assessment year. The AO was instructed to provide a reasonable opportunity for the assessee to be heard before re-evaluating the deduction under Rule 8D(2)(iii) of the IT Rules.

In conclusion, the appeal of the assessee was allowed for statistical purposes, and the decision was pronounced on 6th February 2015 by the ITAT Delhi.

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