2021 (6) TMI 388 - AT - Income Tax

ITAT directs exclusion of non-exempt mutual funds from disallowance calculation under Sec. 14A

M/s D.S. Purbhoodas & Co. Versus Asstt. Commissioner of Income Tax -17 (1), Mumbai

The ITAT allowed the appeal, directing the AO to exclude mutual funds not yielding exempt income from disallowance calculation under Sec. 14A r.w. Rule ... Disallowance u/s 14A r.w. Rule 8D(2)(iii) - HELD THAT:- As the assessee had not earned any exempt income from the mutual funds therefore, the same in our considered view could not have been included for the purpose of computing the ‘average value of investments’ while quantifying the disallowance u/s 14A r.w. Rule 8D (2)(iii). Our aforesaid view is fortified by the order in the case of ACIT & Anr. Vs. Vireet Investment Pvt. Ltd. & Anr. [2017 (6) TMI 1124 - ITAT DELHI] In the said case it was observed by the Tribunal that as per rule 8D(2)(iii), only those investments were to be considered for computing ‘average value of investment’ which had yielded exempt income during year under consideration. Accordingly, in the backdrop of our aforesaid deliberations, we herein direct the A.O to exclude the mutual funds which had not yielded any exempt income during the year for the purpose of quantifying the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) in the hands of the assessee. Inclusion of an amount on the basis of Form 26AS to the returned income of the assessee - HELD THAT:- We find, that as per Form 26AS commission income stated to have been received from “Abu Dhabi Commercial Bank Ltd. – Churchgate Branch” stands reflected in the annual tax statement of the assessee. In rebuttal, it is submitted by the ld. A.R that no part of the aforesaid amount of income belongs to the assessee. As the assessee had declined of having owned any part of the aforesaid income, the same, thus, could not have been summarily added by the A.O as its income. The assessee who had denied ownership of the aforesaid income or the source thereof, we are of the considered view that the A.O was not justified in adding the impugned amount as the income of the assessee. Multiple reasons leading to the aforesaid anomaly in reflection of the above mentioned amount in the annual tax statement of the assessee cannot be ruled out. Be that as it may, we are of the considered view that the matter in all fairness requires to be revisited by the A.O, who is directed to verify the aforesaid claim of the assessee. A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its aforesaid claim - Appeal of the assessee is allowed Issues:1. Disallowance under Sec. 14A r.w. Rule 8D(2)(iii) regarding the inclusion of mutual fund investments in the 'average value of investments' for calculating disallowance.2. Addition of an amount based on Form 26AS to the returned income of the assessee.Issue 1: Disallowance under Sec. 14A r.w. Rule 8D(2)(iii) regarding mutual fund investments:The appeal was against the CIT(A)'s order upholding the AO's assessment under Sec. 143(3) of the Income Tax Act, 1961 for A.Y. 2013-14. The AO had reworked the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) by including mutual fund investments in the 'average value of investments,' resulting in a higher disallowance of &8377; 3,65,575. The assessee contended that only exempt income-yielding shares were considered for the disallowance, resulting in a lower disallowance of &8377; 548. The ITAT analyzed the case and held that investments that did not yield exempt income, such as mutual funds, should not be included in the 'average value of investments' for disallowance calculation. Citing a previous ITAT order, the ITAT directed the AO to exclude mutual funds that did not yield exempt income while quantifying the disallowance under Sec. 14A r.w. Rule 8D(2)(iii).Issue 2: Addition of an amount based on Form 26AS to the returned income:The second issue pertained to the addition of &8377; 13,758 to the assessee's income based on Form 26AS, reflecting commission income allegedly received from a specific bank. The assessee denied ownership of this income. The ITAT observed that the AO had added this amount without proper verification, solely based on Form 26AS. Considering the assessee's denial and the need for further investigation, the ITAT directed the AO to revisit the issue, verify the claim of the assessee, and provide an opportunity for the assessee to substantiate their position during the proceedings.In conclusion, the ITAT allowed the appeal of the assessee, directing the AO to exclude mutual funds that did not yield exempt income while calculating the disallowance under Sec. 14A r.w. Rule 8D(2)(iii). Additionally, the ITAT instructed the AO to reevaluate the addition of &8377; 13,758 to the assessee's income, ensuring a fair opportunity for the assessee to present their case.