Tribunal Limits Disallowance to Exempt Income, Supports Exclusion from Book Profit; Revenue's Appeal Dismissed.

The Tribunal upheld the CIT(A)'s decision to restrict the disallowance under Section 14A to the amount of exempt income, reversing the AO's higher computation. The Tribunal also agreed with the CIT(A) in reversing the AO's addition of this disallowance to the book profit under Section 115JB, citing lack of contrary precedents. The assessee's cross objection was allowed, with the Tribunal directing the AO to consider only dividend-yielding investments for calculating the average value under Rule 8D. The revenue's appeal was dismissed, and the assessee's contentions were accepted.

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Issues involved:
The judgment involves issues related to the disallowance under sections 14A and 115JB of the Income Tax Act for the assessment year 2014-15.

Disallowance under Section 14A:
The assessee, engaged in power generation projects, received exempt income from mutual fund units. The Assessing Officer (AO) initially computed a disallowance under Rule 8D at a high amount, which was later reduced. The assessee contended that the disallowance should not exceed the exempt income, citing a Delhi High Court decision. The Commissioner of Income Tax (Appeals) (CIT(A)) agreed with this contention and directed the AO to restrict the disallowance to the exempt income. The AO had added this disallowance to the book profit under section 115JB, but the CIT(A) reversed this action, following previous judicial decisions. The revenue appealed against these decisions.

Disallowance under Section 115JB:
The AO's addition of the disallowance under section 14A to the book profit under section 115JB was reversed by the CIT(A) based on precedents. The revenue challenged this decision, but the Tribunal upheld the CIT(A)'s order, noting the lack of contrary decisions presented by the revenue.

Cross Objection by the Assessee:
The assessee filed a cross objection, arguing that for computing the average value of investments under Rule 8D, only investments yielding dividend income should be considered. This contention was supported by a decision of the Delhi Special Bench. The Tribunal directed the AO to calculate the average value of investments based on dividend-yielding investments and to apply specific principles. If the disallowance computed under these principles is lower than the exempt income, the disallowance under section 14A should be restricted accordingly. The Tribunal dismissed the revenue's appeal and allowed the assessee's cross objection.

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