Section 14A disallowance applies only to investments yielding exempt income in relevant assessment year

ITAT Chennai upheld CIT(A)'s direction that disallowance under section 14A should only consider investments yielding exempt income during the relevant year, following Vireet Investment precedent. The tribunal dismissed revenue's appeal on this issue. However, regarding disallowance under section 115JB for book profit computation, the matter was remitted to AO for fresh adjudication, directing computation without applying section 14A read with Rule 8D provisions. Revenue's appeal was partly allowed for statistical purposes.

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Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Recomputation of disallowance on investments yielding exempt income.
3. Inclusion of disallowance under section 14A in book profit under section 115JB.

Detailed Analysis:

1. The appeal pertains to the disallowance under section 14A of the Income Tax Act. The Assessing Officer disallowed Rs. 8,29,14,403/- under section 14A r.w. Rule 8D due to investments yielding exempt income. The ld. CIT(A) directed the Assessing Officer to recompute the disallowance only on investments yielding exempt income during the relevant year. The Revenue contended that Rule 8D should be applied even if no exempt income was earned in a year. The Tribunal, following the decision in ACIT v. Vireet Investment (P) Ltd., upheld the ld. CIT(A)'s order, stating that only investments yielding exempt income should be considered for disallowance under section 14A.

2. The next issue was the inclusion of disallowance under section 14A in the book profit under section 115JB of the Act. The Assessing Officer added the disallowance while computing the book profit. The ld. CIT(A) deleted the disallowance, relying on Explanation-1(f) of Section 115JB(2). However, the Tribunal found that Section 14A is a provision for deemed expenditure on exempt income, while Section 115JB deals with deemed income. The Tribunal referred to the decision in ACIT v. Vireet Investment (P) Ltd., stating that disallowance under section 14A should not impact the computation of book profit under section 115JB. The issue was remitted back to the Assessing Officer for fresh adjudication in line with the Tribunal's decision.

3. The Tribunal concluded that the disallowance under section 14A should only be based on investments yielding exempt income and not added to the book profit under section 115JB. The appeal filed by the Revenue was partly allowed for statistical purposes, and the Assessing Officer was directed to compute the disallowance of expenses related to earning exempt income for book profit in accordance with the Tribunal's decision in ACIT v. Vireet Investment (P) Ltd.

In summary, the Tribunal upheld the ld. CIT(A)'s order regarding the disallowance under section 14A and directed the Assessing Officer to recompute the disallowance based on investments yielding exempt income. Additionally, the Tribunal clarified that disallowance under section 14A should not impact the computation of book profit under section 115JB, as per the decision in ACIT v. Vireet Investment (P) Ltd.

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