Partial allowance of appeals on disallowance under Section 14A of Income Tax Act

The tribunal partially allowed the appeals concerning disallowance under Section 14A of the Income Tax Act for exempted income earned. It directed the Assessing Officer to restrict the disallowance to the exempt income earned by the assessee and to consider only investments yielding exempt income for indirect expenditure disallowance. Additionally, the tribunal instructed the AO to add back direct expenditures related to earning exempt income while computing Book Profits under Section 115JB. The tribunal ordered a recomputation of income under normal provisions and Section 115JB for both Assessment Years, resulting in partial allowance of the appeals.

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Issues:
- Disallowance under Section 14A of the Income Tax Act, 1961 for exempted income earned.
- Consideration of direct and indirect expenditures related to earning exempt income.
- Adjustment of disallowance while computing Book Profits under Section 115JB.

Analysis:
Issue 1: Disallowance under Section 14A for exempted income earned
- The appeal contested the disallowance made under Section 14A of the Income Tax Act, 1961 for exempted income earned.
- The assessee, a resident corporate entity engaged in financing and trading of fabrics, had its income determined at Rs. 113.51 Lacs after disallowance under Section 14A for Rs. 25.10 Lacs.
- The assessee earned exempt dividend income of Rs. 24.10 Lacs and offered a suo-moto disallowance of Rs.0.54 Lacs under Section 14A.
- The CIT(A) directed the AO to restrict the disallowance to Rs. 24.10 Lacs, being the exempt income earned by the assessee.
- The tribunal held that interest disallowance under Rule 8D(2)(ii) was not warranted as the assessee's own funds exceeded the investments, following precedents and case laws.
- The tribunal directed the AO to add back direct expenditure while computing Book Profits under Section 115JB.

Issue 2: Consideration of direct and indirect expenditures
- The tribunal directed the AO to consider only those investments yielding exempt income during the year for disallowance of indirect expenditure under Rule 8D(2)(iii).
- The AO was instructed to add back direct expenditure related to earning exempt income while computing Book Profits under Section 115JB.

Issue 3: Adjustment of disallowance while computing Book Profits
- The tribunal directed the AO to recompute the income under normal provisions and Section 115JB based on the above orders for both Assessment Years.
- Consequently, both appeals were partly allowed as per the tribunal's orders pronounced on 10th February 2020.

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