2018 (11) TMI 1111 - AT - Income Tax

Tribunal partially allows appeal on Section 14A disallowance, provides guidelines for Rule 8D(2)(iii) computation

Ms. Spaco Technologies (India) Pvt. Ltd. Versus DCIT, Circle 5 (3) (2), Mumbai

The appeal challenging the CIT(A) order on disallowance under Section 14A of the Income Tax Act, 1961 was partly allowed by the Tribunal. The Tribunal ... Disallowance u/s 14A read with Rule 8D - CIT(A) has directed the AO to exclude the investment made in growth funds while computing the average value of investments since the growth funds do not yield any dividend - Held that:- Assessee, by placing reliance on the Special Bench decision rendered in the case of Vireet Investment Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] has requested for exclusion of investments which did not yield dividend income during the year under consideration for the purpose of computing average investments. We find merit in the said request of the assessee as the said plea is in accordance with the decision rendered by the Special Bench referred supra. Accordingly we modify the order passed by the CIT(A) and direct the AO to exclude the investments made in growth funds as well as investments which did not yield dividend income during the year under consideration while working out average value of investments. The amount of ₹ 1,26,000/- voluntarily disallowed by the assessee should be given set off against the amount of disallowance computed under Rule 8D(2)(iii) of the I.T. Rules for the reasons discussed above. We order accordingly. AO has not recorded proper satisfaction as contemplated under Section 14A(2) of the Act. However, he did not press the same during the course of hearing and hence we decline to adjudicate the said plea of the assessee. Appeal filed by the assessee is partly allowed. Issues:Challenge to CIT(A) order on disallowance under Section 14A of the Income Tax Act, 1961.Analysis:1. The appellant challenged the order of the CIT(A) regarding the disallowance made under Section 14A of the Income Tax Act, 1961. The appellant, engaged in manufacturing, had earned exempt income during the relevant year. The Assessing Officer computed the disallowance per Rule 8D, resulting in an addition to the returned income.2. The CIT(A) found that the appellant had interest-free funds, leading to the deletion of interest expenditure disallowance under Rule 8D(2)(ii). The disallowance made by the appellant was considered as direct expenditure under Rule 8D(2)(i). The CIT(A) allowed the appellant's ground partially concerning administrative expenditure under Rule 8D(2)(iii) by excluding investments in growth funds from the computation of average value of investments.3. The appellant contended that investments not yielding dividend income should be excluded from the average value calculation, citing a Delhi Special Bench Tribunal decision. The appellant voluntarily disallowed certain expenses, which were not considered by the tax authorities. The Tribunal noted the direct expenditure disallowed by the appellant under Rule 8D(2)(i) and administrative expenditure under Rule 8D(2)(iii).4. The Tribunal observed that the CIT(A) had already deleted the interest expenditure disallowance under Rule 8D(2)(ii). It clarified that the disallowance made by the appellant pertained to administrative expenses under Rule 8D(2)(iii). The Tribunal directed the exclusion of investments in growth funds and those not yielding dividend income while computing the average value of investments, in line with the appellant's request and the Special Bench decision.5. The Tribunal addressed the appellant's argument regarding the AO's satisfaction under Section 14A(2) of the Act, noting that the appellant did not press the issue during the hearing. Consequently, the Tribunal declined to adjudicate on this plea. Ultimately, the appeal filed by the appellant was partly allowed, with specific directions given regarding the computation of disallowances under Rule 8D(2)(iii) and the exclusion of certain investments from the average value calculation.