Tribunal limits disallowance to dividend-yielding investments under Rule 8D(2)(iii)

The Tribunal partly allowed the appeal of the assessee, directing the Assessing Officer to consider only investments yielding dividend income for disallowance under Rule 8D(2)(iii). The disallowance was to be limited to the voluntary disallowance amount. The Tribunal held that actual expenses for earning exempt income should be considered for disallowance under section 14A while computing book profits, dismissing arguments against the use of Rule 8D. The appeal was partly allowed for statistical purposes, with guidelines provided for disallowance computations and expense considerations.

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Issues:
1. Disallowance u/s.14A of the Act read with Rule 8D(2)(iii) under normal provisions and while computing book profits u/s.115JB of the Act.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance made under section 14A of the Income Tax Act, 1961. The assessee, a public limited company engaged in various businesses, declared its total income for A.Y. 2012-13. The Assessing Officer (AO) observed that the assessee had received exempt dividend income and had made a suo moto disallowance of expenses towards earning that income. The AO, however, disagreed with the assessee's disallowance and proceeded to compute the disallowance under Rule 8D(2) of the rules, resulting in a total disallowance of Rs. 1,94,81,758. The Commissioner of Income Tax (Appeals) sustained part of the disallowance under Rule 8D(2)(iii) while deleting the disallowance under the second limb of Rule 8D(2) due to the assessee having sufficient own funds.

The Tribunal considered the validity of the disallowance made under the third limb of Rule 8D(2) of the rules. It was noted that the AO had ignored the assessee's voluntary disallowance and resorted to the computation mechanism under Rule 8D. The Tribunal directed the AO to consider only those investments that had yielded dividend income to the assessee during the year for computing the disallowance under the third limb of Rule 8D(2). The disallowance was to be restricted to a minimum of the voluntary disallowance made by the assessee. The Tribunal partly allowed the grounds raised by the assessee for statistical purposes.

Regarding the disallowance while computing book profits u/s.115JB of the Act, the Tribunal referred to a Special Bench decision stating that the computation mechanism under Rule 8D cannot be applied for making disallowance u/s.14A while computing book profits. The Tribunal held that the actual expenses incurred for earning exempt income should be considered for disallowance. The Tribunal dismissed the arguments against the disallowance u/s.14A read with Rule 8D while computing book profits, stating that the AO had validly resorted to the computation mechanism provided in Rule 8D(2). The Tribunal partly allowed the grounds raised by the assessee for statistical purposes.

In conclusion, the appeal of the assessee was partly allowed for statistical purposes, with directions given regarding the computation of disallowances under Rule 8D(2) and the consideration of actual expenses for disallowance while computing book profits.

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