Tribunal directs reassessment of disallowance under Section 14A

The Tribunal directed the Assessing Officer to recompute the disallowance under Section 14A read with Rule 8D(2)(iii) by considering only the investments which yielded exempt income during the year. The assessee's appeal was partly allowed, following the decision of the Special Bench of ITAT Delhi in Vireet Investments (P) Ltd. The Tribunal's decision was pronounced on December 13, 2018.

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Issues Involved:
1. Sustaining the addition of Rs. 8,40,705/- under Section 14A of the Income Tax Act.
2. Consideration of only those investments which yielded exempt income for disallowance under Section 14A read with Rule 8D(2)(iii).

Detailed Analysis:

1. Sustaining the Addition of Rs. 8,40,705/- under Section 14A of the Income Tax Act:

The assessee, a company engaged in the real estate business, filed its return of income for the Assessment Year 2012-13 declaring an income of Rs. 4,22,93,828/-. The case was scrutinized, and the assessment was completed under Section 143(3) of the Income Tax Act, 1961, determining the total income at Rs. 4,31,34,533/- after disallowing Rs. 8,40,705/- under Section 14A read with Rule 8D(2)(iii). The disallowance was made in respect of exempt dividend income of Rs. 1 Crore earned by the assessee. The CIT(A) upheld this disallowance. The assessee contended that the dividend was received on one date and credited to the bank account without incurring any expenditure for earning it. The assessee also argued that the disallowance was excessive and unreasonable.

2. Consideration of Only Those Investments Which Yielded Exempt Income for Disallowance Under Section 14A Read with Rule 8D(2)(iii):

The assessee argued that the disallowance under Section 14A read with Rule 8D(2)(iii) should be restricted to only the investments which yielded exempt income during the year. The assessee relied on the decision of the Special Bench of ITAT Delhi in the case of ACIT Vs. Vireet Investments (P) Ltd., where it was held that only those investments which yielded exempt income during the year should be considered for disallowance under Rule 8D(2)(iii). The Tribunal noted that the assessee earned exempt dividend income of Rs. 1 Crore from one company, M/s. Embassy Services Pvt. Ltd., and did not disallow any amount suo moto in its accounts. The Tribunal found merit in the assessee's argument and held that only those investments which yielded exempt income during the year should be considered for computing the average value of investments for disallowance under Rule 8D(2)(iii).

The Tribunal, following the decision of the Special Bench of ITAT Delhi in Vireet Investments (P) Ltd., restored the issue to the file of the Assessing Officer for recomputing the disallowance under Section 14A read with Rule 8D(2)(iii) by restricting the disallowance to the investments which yielded exempt income during the year. Consequently, the assessee's appeal was partly allowed.

Conclusion:

The Tribunal directed the Assessing Officer to recompute the disallowance under Section 14A read with Rule 8D(2)(iii) by considering only the investments which yielded exempt income during the year. The assessee's appeal was partly allowed. The Tribunal's decision was pronounced in the open court on December 13, 2018.

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