Assessee's appeal allowed for recalculation under Rule 8D(2)(iii) and correction of computation error.

The appeal filed by the assessee was allowed for statistical purposes. The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) by considering only funds generating exempt income and to rectify the arithmetic error in the computation of "profit and gains of business or profession." The order was pronounced in the open court on 27.02.2018.

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Issues Involved:
1. Disallowance under section 14A read with Rule 8D(2)(iii).
2. Addition of income under the head "profit and gains of business or profession."

Detailed Analysis:

1. Disallowance under section 14A read with Rule 8D(2)(iii):

The primary issue raised by the assessee pertains to the disallowance of Rs. 6,36,960/- under section 14A read with Rule 8D(2)(iii) of the Income Tax Act, 1961. The Assessing Officer (AO) noticed that the assessee had earned a dividend income of Rs. 14,79,630/- and claimed interest expenses of Rs. 29,09,739/-. The assessee's balance sheet showed non-current investments of Rs. 8,38,68,940/- and total investments of Rs. 19,57,15,948/- as of 31.03.2012.

The AO applied the provisions of section 14A r.w.r 8D, which led to the disallowance of Rs. 6,36,960/- based on the average value of investments, including both income-generating and non-income-generating funds. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, stating that some expenses must have been incurred by the assessee to manage its investments.

The assessee contended that no expenses were incurred for earning exempt income, as the financial advisor appointed by the mutual fund was paid directly by the mutual fund. The assessee argued that only funds generating exempt income should be considered for disallowance under Rule 8D(2)(iii). The assessee provided a detailed breakdown of funds generating and not generating exempt income, showing a significantly lower disallowance of Rs. 96,943/- if only income-generating funds were considered.

The Tribunal noted that disallowance under Rule 8D(2)(iii) should be related to funds generating exempt income only. Citing precedents from the ITAT Kolkata Bench and the Hon’ble Calcutta High Court, it was held that only investments yielding tax-free income should be considered for disallowance. The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) by considering only funds generating exempt income.

2. Addition of income under the head "profit and gains of business or profession":

The second issue raised by the assessee relates to an addition of Rs. 25,000/- made by the AO under the head "profit and gains of business or profession." The assessee pointed out a discrepancy in the AO's computation, where the AO initially took the amount of Rs. 7,15,07,112/- as "profit and gains of business or profession" but later correctly computed it as Rs. 7,08,45,144/- after making the disallowance under section 14A.

The assessee provided a reconciliation showing the difference of Rs. 25,008/-, which needed rectification. The Tribunal acknowledged the arithmetic error and directed the AO to rectify the mistake as per the provisions of law.

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes. The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) by considering only funds generating exempt income and to rectify the arithmetic error in the computation of "profit and gains of business or profession." The order was pronounced in the open court on 27.02.2018.

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