AO must consider only dividend-yielding investments for section 14A disallowance computation under Rule 8D

ITAT Mumbai partially allowed the appeal. The AO properly recorded satisfaction before invoking Rule 8D for section 14A disallowance, but must consider only dividend-yielding investments for computation. Interest on Perpetual Non-Convertible Debentures was held allowable under section 36(1)(iii) based on precedent. Compensatory Afforestation Fund contribution was deemed allowable expenditure. Book profit computation under section 115JB should exclude section 14A disallowance. Additional claim for PNCD interest deduction was restored to AO for fresh consideration. AO was directed to expeditiously decide pending TDS/TCS credit application. Leave encashment deduction was allowed for actual payments made before return filing due date.

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Issues Involved:
1. General ground
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D
3. Disallowance of claim for Education Cess
4. Disallowance of interest paid on Perpetual Non-Convertible Debentures (PNCDs)
5. Disallowance of expenditure incurred on Compensatory Afforestation
6. Deduction under Section 80G
7. Details of Capital Gains not considered properly
8. Income from business as per Schedule BP not considered properly and arithmetical error in summation
9. Disallowance under Section 14A vis-à-vis computation of Book Profit under Section 115JB
10. Non-grant of deduction of interest on PNCD in computation of Book Profit under Section 115JB
11. Short grant of TDS/TCS Credit
12. Non-Granting of Relief under Section 90/91 of the Act
13. Disallowance of provision for leave encashment (AY 2017-18)

Issue-wise Detailed Analysis:

1. General Ground:
The general ground was not specifically addressed in the judgment.

2. Disallowance under Section 14A read with Rule 8D:
The assessee's primary contention was that the Assessing Officer (AO) did not record dissatisfaction with the assessee's computation of disallowance under Section 14A, as mandated by Section 14A(2). The Tribunal found that the AO had indeed recorded reasons for rejecting the assessee's calculation and proceeded to compute disallowance under Rule 8D. However, the Tribunal accepted the alternate plea that only dividend-yielding investments should be considered for the purpose of disallowance under Rule 8D(2)(iii). Thus, the AO was directed to recompute the disallowance accordingly, and the ground was partly allowed.

3. Disallowance of claim for Education Cess:
The assessee did not press this ground, and it was dismissed as not pressed.

4. Disallowance of interest paid on Perpetual Non-Convertible Debentures (PNCDs):
The Tribunal referred to its earlier decision in the assessee's case for AY 2011-12 and 2012-13, where it was held that the interest paid on PNCDs is an allowable deduction under Section 36(1)(iii). The Tribunal found that the PNCDs in question were the same, and thus, the interest expenditure was allowable. This ground was allowed.

5. Disallowance of expenditure incurred on Compensatory Afforestation:
The Tribunal referred to its decision in the assessee's case for AY 2006-07, where it was held that contribution towards the Compensatory Afforestation Fund is an allowable expenditure. Following this precedent, the Tribunal allowed the ground.

6. Deduction under Section 80G:
The assessee did not press this ground, and it was dismissed as not pressed.

7. Details of Capital Gains not considered properly:
The assessee did not press this ground, and it was dismissed as not pressed.

8. Income from business as per Schedule BP not considered properly and arithmetical error in summation:
The assessee did not press this ground, and it was dismissed as not pressed.

9. Disallowance under Section 14A vis-à-vis computation of Book Profit under Section 115JB:
The Tribunal referred to the Special Bench decision in the case of Vireet Investments Pvt. Ltd., which held that computation under clause (f) of Explanation 1 to Section 115JB should be made without resorting to the computation under Section 14A read with Rule 8D. This ground was allowed.

10. Non-grant of deduction of interest on PNCD in computation of Book Profit under Section 115JB:
The Tribunal noted that the assessee had not claimed this deduction in the return of income. However, it restored the matter to the AO for consideration, as appellate authorities can admit fresh claims. This ground was allowed for statistical purposes.

11. Short grant of TDS/TCS Credit:
The Tribunal directed the AO to dispose of the assessee's application under Section 154 for allowing full TDS/TCS credit expeditiously, preferably within six months. This ground was allowed for statistical purposes.

12. Non-Granting of Relief under Section 90/91 of the Act:
The assessee did not press this ground, and it was dismissed as not pressed.

13. Disallowance of provision for leave encashment (AY 2017-18):
The Tribunal found that the assessee had claimed deduction for leave encashment based on actual payments and directed the AO to allow the amounts actually paid towards leave encashment before the due date of filing the return. This ground was allowed.

Conclusion:
The appeals for AY 2016-17 and AY 2017-18 were partly allowed, with specific directions issued for recomputation and consideration of certain claims by the AO.

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