Assessee's appeal allowed, Revenue's appeal dismissed on disallowance computation & book profit exclusion

The assessee's appeal was allowed, directing the Assessing Officer to restrict the disallowance under Section 14A read with Rule 8D to the extent computed under Rule 8D(2)(iii), excluding non-income yielding investments, subject to an upper limit of the exempt income earned. The revenue's appeal was dismissed, affirming the CIT(A)'s methodology for disallowance computation and the exclusion of such disallowance from book profit under Section 115JB.

---

---

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the Income-Tax Rules, 1962.
2. Methodology for quantifying disallowance under Section 14A.
3. Addition of disallowance to book profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

Disallowance under Section 14A:
The assessee challenged the disallowance of Rs. 1,88,58,934/- made by the Assessing Officer (A.O) under Section 14A read with Rule 8D(2)(iii) of the Income-Tax Rules, 1962. The A.O had worked out the disallowance at Rs. 24,34,11,363/- based on the proportion of investments made in exempt income-yielding shares. The CIT(A) observed that disallowance under Section 14A read with Rule 8D should be made only in respect of investments that yielded exempt income during the year and that no disallowance of interest expenditure was warranted given the availability of self-owned funds. Consequently, the CIT(A) restricted the disallowance to the extent of exempt income earned by the assessee, i.e., Rs. 1,88,58,934/-.

The assessee contended that the disallowance under Rule 8D(2)(iii) should be based on investments yielding exempt income during the year and should be restricted to the exempt income if it exceeds the computed disallowance. The Tribunal found substantial force in the assessee's claim and directed the A.O to restrict the disallowance under Section 14A read with Rule 8D to the extent worked out under Rule 8D(2)(iii), excluding investments that did not yield exempt income, subject to an upper limit of the exempt income earned during the year.

Methodology for Quantifying Disallowance:
The revenue's appeal contended that the CIT(A) erred in deviating from the prescribed methodology under Rule 8D and excluding investments that did not yield exempt income while computing disallowance. The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench of the ITAT Delhi in ACIT & Anr. Vs. Vireet Investments Pvt. Limited & Anr., which stated that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii).

Addition to Book Profit under Section 115JB:
The revenue also challenged the CIT(A)'s decision that the disallowance computed under Section 14A read with Rule 8D was not required to be added to the book profit under Section 115JB. The Tribunal upheld the CIT(A)'s view, citing the Special Bench of the ITAT Delhi in Vireet Investments Pvt. Limited, which clarified that the computation under clause (f) of Explanation 1 to Section 115JB(2) should be made without resorting to the computation under Section 14A read with Rule 8D.

Conclusion:
- The appeal of the assessee was allowed, directing the A.O to restrict the disallowance under Section 14A read with Rule 8D to the extent computed under Rule 8D(2)(iii), excluding non-income yielding investments, subject to an upper limit of the exempt income earned.
- The revenue's appeal was dismissed, affirming the CIT(A)'s methodology for disallowance computation and the exclusion of such disallowance from book profit under Section 115JB.

---