Section 14A disallowance restricted where Rule 8D computation exceeded a reasonable amount and suo motu disallowance was credited.

Expenditure relatable to exempt dividend and bond income was examined under section 14A, with Rule 8D applied to increase the assessee's suo motu disallowance. The ITAT followed the assessee's own earlier years, where the administrative expenditure component had been restricted having regard to the nature of investments in bonds and securities. On that basis, the disallowance was confined to a reasonable figure, and credit was allowed for the amount already disallowed by the assessee. The balance addition was deleted.

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Issues: Disallowance of expenditure relating to exempt income under section 14A of the Income-tax Act, 1961 and the applicability of Rule 8D of the Income-tax Rules, 1962.

Analysis: The assessee had earned exempt income from dividends and interest on bonds and had itself made a suo motu disallowance towards expenses relatable to such income. The Assessing Officer applied Rule 8D and made a higher disallowance, which was sustained in appeal. The Tribunal noted that in the assessee's earlier years, identical disallowance had been examined and the administrative expenditure component worked out under Rule 8D had been restricted having regard to the nature of investments in bonds and securities. Following that consistent view in the assessee's own case for earlier assessment years, the Tribunal held that the disallowance under section 14A should be confined to a reasonable figure and that the assessee should get credit for the amount already disallowed suo motu.

Conclusion: The disallowance was restricted to Rs. 12 lakhs under section 14A of the Income-tax Act, 1961, with benefit of the suo motu disallowance already made by the assessee, and the balance addition was deleted.

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