Tribunal directs reassessment of disallowance under Rule 8D(2)(iii)

The Tribunal partly allowed the appeal, directing the Assessing Officer to recompute the disallowance under Rule 8D(2)(iii) by considering only investments yielding exempt income and to reduce the suomoto disallowed Portfolio Management Scheme expenses from the disallowance computed under Rule 8D(2)(iii). The Tribunal found that the Assessing Officer did not properly record satisfaction before invoking Rule 8D, leading to an improper action.

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Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Satisfaction of the Assessing Officer (AO) before invoking Rule 8D.
3. Correct computation under Rule 8D(2)(iii).
4. Credit of suomoto disallowance of Portfolio Management Scheme (PMS) expenses.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee, running a software development unit, showed significant investments and incurred interest and portfolio management expenses. The AO applied Section 14A and computed disallowance under Rule 8D, resulting in a total disallowance of Rs. 2,98,550/-. The assessee contended that no loan was taken during the year and investments were made from owned funds. The CIT(A) partially agreed, giving relief on Rule 8D(2)(ii) but upheld the disallowance under Rule 8D(2)(iii).

2. Satisfaction of the Assessing Officer (AO) before invoking Rule 8D:
The assessee argued that the AO did not record his satisfaction regarding the correctness of the disallowance made by the assessee. The Tribunal noted that under Sub-Section (2) of Section 14A, the AO must examine the accounts and record satisfaction if not satisfied with the assessee's claim. The Tribunal found that the AO did not record such satisfaction before invoking Rule 8D, making the action improper. This principle was supported by judicial pronouncements, including those from the Punjab & Haryana High Court and the Delhi High Court.

3. Correct computation under Rule 8D(2)(iii):
The assessee contended that the AO incorrectly included both tax-free and taxable income-bearing investments in the computation under Rule 8D(2)(iii). The CIT(A) agreed and directed the AO to recompute the disallowance by considering only the investments yielding exempt income. The Tribunal modified the CIT(A)'s order, explicitly directing the AO to consider only the investments yielding exempt income for the computation under Rule 8D(2)(iii).

4. Credit of suomoto disallowance of Portfolio Management Scheme (PMS) expenses:
The assessee had suomoto disallowed Rs. 1,81,677/- as PMS expenses. The AO did not give credit for these expenses while computing disallowance under Rule 8D. The Tribunal noted that these expenses, being administrative costs related to earning tax-free income, should be considered under Rule 8D(2)(iii). The Tribunal directed the AO to reduce the amount of PMS expenses from the disallowance computed under Rule 8D(2)(iii), aligning with similar decisions from the Bangalore Bench of the ITAT and the Delhi ITAT.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to:
1. Recompute the disallowance under Rule 8D(2)(iii) by considering only investments yielding exempt income.
2. Reduce the suomoto disallowed PMS expenses from the disallowance computed under Rule 8D(2)(iii).

Order pronounced in the open court on 14/08/2015.

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