ITAT affirms CIT(A)'s decisions on disallowance of expenses related to exempt income.

The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues. The judgment clarified the disallowance of expenses related to exempt income under section 14A with Rule 8D and the interaction with section 115JB, stating that the disallowance under section 14A should be separate from the computation under section 115JB, following precedents set in previous cases.

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Issues:
1. Disallowance of expenses relatable to exempt income under section 14A read with Rule 8D.
2. Applicability of provisions of section 115JB in respect to disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D.

Issue 1: Disallowance of expenses relatable to exempt income under section 14A read with Rule 8D:
The first issue in this appeal pertains to the disallowance of expenses relatable to exempt income under section 14A read with Rule 8D. The Assessing Officer disallowed interest expenditure and administrative expenses under Rule 8D(ii) and Rule 8D(iii) respectively. The CIT(A) upheld the disallowance of administrative expenses but deleted the disallowance of interest expenditure by relying on the decision of the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank. The assessee argued that no disallowance should be made under Rule 8D(ii) as the own funds of the assessee exceeded the total investment giving rise to exempt income. The ITAT affirmed the CIT(A)'s order based on the presumption that the assessee used own funds for investments earning exempt income, following the decision in the case of HDFC Bank.

Issue 2: Applicability of provisions of section 115JB in respect to disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D:
The second issue in this appeal concerns the applicability of provisions of section 115JB in respect to the disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D. The revenue contended that the disallowance under section 14A should be added to the book profit under section 115JB. However, the CIT(A) directed the AO not to add the disallowance under section 14A to the book profit under section 115JB, relying on the decision of the Special Bench of ITAT Delhi in the case of Vireet Investment Pvt Ltd. The ITAT confirmed the CIT(A)'s order, stating that the disallowance under section 14A should be made without resorting to the computation as contemplated under section 115JB, in line with the decision in the case of Vireet Investment Pvt Ltd.

In conclusion, the ITAT dismissed the appeal of the revenue, upholding the decisions of the CIT(A) on both issues. The judgment provides clarity on the disallowance of expenses relatable to exempt income under section 14A read with Rule 8D and the interaction between the provisions of section 115JB in such cases.

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