Tribunal Limits Disallowance to Exempt Income Investments

The Tribunal partly allowed the appeal, dismissing challenges on the need for recording satisfaction before invoking Rule 8D. The request to restrict disallowance to investments yielding exempt income was granted, directing the AO to compute disallowance based only on such investments. The order was issued on 17th March 2022.

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Issues:
Challenge to addition made under section 14A r.w. Rule 8D(2)(iii) without recording satisfaction.
Request for direction to restrict disallowance to investments yielding exempt income.

Analysis:
1. The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2014-15, specifically challenging the addition made under section 14A r.w. Rule 8D(2)(iii) without recording satisfaction. The Assessing Officer (AO) disallowed an amount under Rule 8D(2)(iii) based on the working of disallowance submitted by the assessee. The CIT(A) deleted part of the disallowance under Rule 8D(2)(ii) but confirmed the disallowance under Rule 8D(2)(iii) as the assessee failed to point out any errors in the working of disallowance. The Tribunal rejected the argument that satisfaction of non-acceptance of accounts is a pre-condition before invoking Rule 8D, as the assessee had submitted the working of disallowance voluntarily, accepting the applicability of Rule 8D.

2. The assessee also raised a ground seeking a direction to restrict the disallowance to investments yielding exempt income. The Tribunal acknowledged the principle of restricting disallowance to investments earning exempt income and directed the AO to compute the disallowance considering only those investments that yielded exempt income. The assessee was given the liberty to submit any additional evidence in this regard.

3. In conclusion, the Tribunal partly allowed the appeal of the assessee, dismissing the challenges regarding the recording of satisfaction before invoking Rule 8D and allowing the request to restrict the disallowance to investments earning exempt income. The order was pronounced on 17th March, 2022.

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