Tribunal Allows Appeals on Disallowance under Section 14A

The Tribunal partially allowed the appeals related to disallowance under section 14A of the Income-tax Act, 1961 for assessment years 2013-14 to 2016-17. The Tribunal ruled in favor of the assessee, directing the Assessing Officer to delete the disallowance of interest expenditure for 2013-14 and 2014-15 as the own funds and interest-free funds exceeded the value of investments. Additionally, the Tribunal instructed the A.O. to recompute disallowances for other expenses by considering only investments generating exempt income, following a decision by the Delhi Special Bench of ITAT. The orders were pronounced on 30th July 2021.

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Issues:
Common issue of disallowance under section 14A of the Income-tax Act, 1961 in appeals related to assessment years 2013-14 to 2016-17.

Analysis:
The appeals were against a common order concerning disallowance made under section 14A of the Income-tax Act, 1961. The assessee, engaged in real estate development, had made investments in subsidiary companies and partnership firms. The disallowance was confirmed by the Ld. CIT(A) for all years. The A.O. computed disallowance under Rule 8D for interest and expenditure. The assessee challenged the decision, arguing against disallowance of interest expenditure and the applicability of Rule 8D. The A.O. had discussed the applicability of section 14A in the assessment order, satisfying the requirement for invoking Rule 8D. The Tribunal rejected the legal ground related to the recording of satisfaction/dissatisfaction by the A.O.

In analyzing the interest disallowance under Rule 8D(2)(ii) for 2013-14 and 2014-15, the Tribunal considered the own funds and interest-free funds available with the assessee, which exceeded the value of investments. Citing a decision by the Hon'ble High Court of Karnataka, it was held that no disallowance of interest expenditure was warranted. Following the court's precedent, the Tribunal directed the A.O. to delete the disallowance for those years.

Regarding the disallowance under Rule 8D(2)(iii) for other expenses, the assessee contended that only investments yielding exempt income should be considered for computing the average value of investments. Relying on a decision by the Delhi Special Bench of ITAT, the Tribunal directed the A.O. to recompute disallowances by considering only those investments that generated exempt income. If the recalculated disallowance was less than the voluntarily disallowed amount in 2016-17, it should be made at the voluntarily disallowed level. Consequently, the appeals were partly allowed, and the orders were pronounced on 30th July 2021.

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