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

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 8D(2)(iii). Additionally, the AO was instructed to reevaluate the addition of &8377;13,758 to the assessee's income based on Form 26AS, providing the assessee an opportunity to substantiate their position.

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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.

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