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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether, while computing disallowance under section 14A read with Rule 8D(2)(iii), only those investments which actually yielded exempt income during the year could be taken into account, and whether the assessee's plea for exclusion of strategic investments could succeed.
Analysis: The assessee had earned dividend income claimed as exempt and had itself offered a small disallowance towards direct and indirect expenditure. The Assessing Officer rejected the computation and applied Rule 8D, which was upheld by the first appellate authority. In appeal, the Tribunal held that section 14A was applicable, but for the purpose of Rule 8D(2)(iii), the disallowance had to be restricted to investments which had actually yielded exempt income during the year, following the Special Bench view in Vireet Investments. The Tribunal rejected the contention that strategic investments, by that description alone, were outside section 14A, and held that such plea lacked merit in view of the Supreme Court decision in Maxopp Investments. The Assessing Officer was therefore directed to recompute the disallowance on the basis of investments yielding exempt income, after giving due opportunity to the assessee.
Conclusion: The disallowance under section 14A was upheld in principle, but its quantum was set aside for fresh computation by limiting the base to investments yielding exempt income during the year; the assessee succeeded only to that extent.
Ratio Decidendi: For disallowance under section 14A read with Rule 8D(2)(iii), only those investments that actually yielded exempt income during the relevant year are to be considered for computation.
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