2024 (12) TMI 1555 - AT - Income Tax

Section 14A Rule 8D disallowance applies only to investments yielding exempt income post-2016 amendment

The ITAT Mumbai held that post-2016 amendment, Section 14A read with Rule 8D disallowance should only consider investments yielding exempt income. The AO ... Disallowance u/s. 14A read with Rule 8D - applicability of Section 14A read with Rule 8D post the 2016 amendment - assessee's grievance is that the Ld. AO applied the provisions as they existed prior to the 2016 amendment - HELD THAT:- When calculating disallowance under Section 14A, only those investments that yield exempt income are to be considered. Specifically, investments in “Air India SATS” and “CIAL” were found to yield dividend income. Based on this, 1% of the average annual investment amounting to Rs. 66,11,81,530/- has been computed as Rs. 66,11,815/-. Both parties have agreed to this addition u/s 14A read with Rule 8D. CIT(A) erred in accepting calculations based on the preamended provisions. Post-amendment, only investments that yield dividend income are to be considered for disallowance. Relying on the decision of Bharatiya International Limited [2024 (1) TMI 157 - ITAT DELHI] the addition is now restricted to Rs. 66,11,815/- under Section 14A of the Act. Assessee appeal partly allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the disallowance under Section 14A of the Income-tax Act, 1961, as confirmed by the National Faceless Appeal Centre (NFAC), was correctly applied to the assessee's case for the assessment year 2017-18.2. Whether the application of Rule 8D of the Income-tax Rules, 1962, in calculating the disallowance was appropriate, particularly in light of the amendments effective from June 9, 2016.3. Whether the disallowance should be restricted to the amount calculated as one percent of the annual average of the monthly averages of the opening and closing balances of the value of investments that yield exempt income.ISSUE-WISE DETAILED ANALYSIS1. Disallowance under Section 14A of the Act- Relevant legal framework and precedents: Section 14A of the Income-tax Act, 1961, disallows expenditure incurred in relation to income that does not form part of the total income. Rule 8D provides the method for computing such disallowance. The constitutional validity of Rule 8D was upheld in the case of Godrej Boyce & Mfg. Co. Ltd.- Court's interpretation and reasoning: The Tribunal noted that the NFAC and the assessing authority applied the provisions of Rule 8D as they existed prior to the 2016 amendment. The Tribunal emphasized that post-amendment, only investments yielding exempt income should be considered for disallowance.- Key evidence and findings: The assessee earned dividend income from investments in Air India SATS and Cochin International Airport Limited, which were subject to disallowance under Section 14A. The Tribunal found that the assessing officer calculated the disallowance based on outdated provisions.- Application of law to facts: The Tribunal applied the amended Rule 8D to the facts, concluding that only investments yielding exempt income should be considered for disallowance calculation.- Treatment of competing arguments: The Tribunal considered the Departmental Representative's argument that the disallowance was correctly calculated but found it unconvincing due to reliance on pre-amendment rules.- Conclusions: The Tribunal concluded that the disallowance under Section 14A should be restricted to Rs. 66,11,815, as it represents one percent of the average annual investment in exempt income-yielding assets.2. Application of Rule 8D of the Income-tax Rules, 1962- Relevant legal framework and precedents: Rule 8D provides the method for calculating disallowance under Section 14A. The amendment effective from June 9, 2016, changed the method of calculation.- Court's interpretation and reasoning: The Tribunal emphasized that the amended Rule 8D should be applied, which considers only those investments that yield exempt income for disallowance purposes.- Key evidence and findings: The Tribunal found that the assessing officer used an outdated calculation method, leading to an incorrect disallowance amount.- Application of law to facts: The Tribunal applied the amended Rule 8D, calculating the disallowance based on the average annual investment in exempt income-yielding assets.- Treatment of competing arguments: The Tribunal referenced the case of Bharatiya International Limited vs. DCIT, supporting the view that disallowance should be limited to investments yielding tax-free income.- Conclusions: The Tribunal concluded that the disallowance should be calculated using the amended Rule 8D, resulting in a reduced disallowance amount.SIGNIFICANT HOLDINGS- Preserve verbatim quotes of crucial legal reasoning: The Tribunal cited the case of Bharatiya International Limited, stating: 'It is well settled law that disallowance under section 14A can be made only in respect of those investments which have yielded tax-free income during the year.'- Core principles established: The Tribunal established that post-amendment Rule 8D should be applied, considering only investments yielding exempt income for disallowance calculations under Section 14A.- Final determinations on each issue: The Tribunal set aside the NFAC's order, modifying the assessment order to restrict the disallowance under Section 14A to Rs. 66,11,815, aligning with the amended Rule 8D.