2025 (5) TMI 2047 - AT - Income Tax

Investments Yielding Exempt Income Determine Section 14A Disallowance Calculation, Ensuring Fair Tax Assessment

AMJ Land Holdings Limited Versus ACIT, Circle 10, Pune

The SC/Tribunal addressed the computation of disallowance under section 14A of Income Tax Act. The key ruling mandates that only investments yielding ... Addition u/s 14A r/w Rule 8D - no disallowance u/s 14A was made in the return although the assessee has huge investments - HELD THAT:- We find in the case Vireet Investment Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] has held that only those investments which have yielded exempt income during the year are to be considered for the purpose of computing the average value of investment. We, therefore, deem it proper to restore the issue to the file of AO with a direction to ascertain the investments that have yielded exempt dividend income during the year and consider the same for the purpose of computing the average value of investments as per Rule 8D of the I.T. Rules, 1962. Appeal filed by the assessee is allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered by the Tribunal is the correctness and legality of the disallowance made under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. Specifically, the question is whether the disallowance amounting to Rs. 3,99,184/- was rightly computed by the Assessing Officer by considering the average value of all investments held by the assessee or whether only those investments which yielded exempt income during the relevant year should be considered for the purpose of computing the disallowance under section 14A.2. ISSUE-WISE DETAILED ANALYSISIssue: Computation of disallowance under section 14A read with Rule 8D - scope of investments to be consideredRelevant legal framework and precedents: Section 14A of the Income Tax Act, 1961 empowers the Assessing Officer to disallow expenditure incurred in relation to income which does not form part of the total income under the Act, such as exempt dividend income. Rule 8D of the Income Tax Rules, 1962 provides a method for computing such disallowance, including the calculation of average value of investments that yield exempt income.The Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. (reported at 82 taxmann.com 415) has held that for the purpose of computing the average value of investments under Rule 8D, only those investments which have yielded exempt income during the relevant year should be considered. This precedent restricts the scope of investments to those directly connected with exempt income, rather than all investments held by the assessee.Court's interpretation and reasoning: The Tribunal observed that the Assessing Officer had made the disallowance by considering all investments held by the assessee, without distinguishing between those investments that yielded exempt income and those that did not. The assessee contended that since its own funds were substantially higher than the investment in shares, and no borrowed funds were diverted for investment in shares, the disallowance was not justified. However, the Assessing Officer rejected this explanation and proceeded with the disallowance.Upon review, the Tribunal found that the Special Bench decision in Vireet Investment Pvt. Ltd. squarely applies to the facts of the present case. It mandates that only investments yielding exempt income should be considered for computing the average value of investments for disallowance under section 14A read with Rule 8D.Key evidence and findings: The assessee's return declared nil income and did not make any disallowance under section 14A initially. The Assessing Officer, during scrutiny, identified substantial investments and made a disallowance of Rs. 3,99,184/-. The assessee's explanation regarding the source of funds and non-diversion of borrowed funds was rejected without detailed quantification. The Tribunal noted that the Assessing Officer did not verify which investments yielded exempt income, a critical factor as per the binding precedent.Application of law to facts: The Tribunal applied the binding precedent from the Special Bench and found that the Assessing Officer's approach was inconsistent with the legal position. Since the disallowance computation did not segregate investments yielding exempt income, the matter required reconsideration. The Tribunal therefore directed the Assessing Officer to re-examine the investments and compute the disallowance only on the basis of investments that yielded exempt dividend income during the year, following the method prescribed under Rule 8D.Treatment of competing arguments: The assessee's counsel relied heavily on the Special Bench decision and sought restoration of the matter for fresh computation. The Department's representative conceded the applicability of the Special Bench decision and did not oppose restoration. This consensus reinforced the Tribunal's decision to remand the matter for fresh consideration in line with settled law.Conclusions: The Tribunal concluded that the disallowance under section 14A read with Rule 8D must be computed by considering only those investments that have yielded exempt income during the year. The matter was remanded to the Assessing Officer for fresh adjudication with due opportunity to the assessee.3. SIGNIFICANT HOLDINGSThe Tribunal held:'We find the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. (supra) has held that only those investments which have yielded exempt income during the year are to be considered for the purpose of computing the average value of investment. We, therefore, deem it proper to restore the issue to the file of the Assessing Officer with a direction to ascertain the investments that have yielded exempt dividend income during the year and consider the same for the purpose of computing the average value of investments as per Rule 8D of the I.T. Rules, 1962. Needless to say the Assessing Officer shall give due opportunity of being heard to the assessee and decide the issue as per fact and law.'Core principles established include:Disallowance under section 14A read with Rule 8D must be computed based on investments yielding exempt income only.The Assessing Officer is required to identify and verify the exempt income-yielding investments before computing the disallowance.The assessee must be given a fair opportunity to present evidence and arguments during reassessment.Final determination on the issue was to set aside the impugned order and remit the matter to the Assessing Officer for fresh determination consistent with the Special Bench precedent and applicable law.