Disallowance under Section 14A limited to investments actually yielding exempt income, requiring Rule 8D recalculation.

Disallowance under the income-tax rule framework was addressed by treating computation method as determinative: Rule 8D application should be confined to investments that actually yielded exempt income, and the disallowance must be recalculated on the average of such investments. On recalculation and after permitting a suo-moto deduction, the net disallowance was reduced and the assessing officer was directed to restrict the addition accordingly, with reliance on higher-court precedent for the same proposition. The appeal was partly allowed in favour of the taxpayer.

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Issues: Whether the disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 was correctly computed and confirmed by the Commissioner (Appeals) as Rs. 29,31,778/-.

Analysis: The Tribunal examined the assessment record and the computation methodology adopted by the Assessing Officer, noting that the AO applied Rule 8D across all investments including those that did not yield exempt income. The assessee had placed on record details to demonstrate that the disallowance should be computed on the basis of average investment that actually yielded exempt income during the year. On recalculation using the average investment yielding exempt income, the Tribunal found the disallowance to be Rs. 11,00,748/-, and after allowing the suo-moto deduction of Rs. 25,000/-, the net disallowance was Rs. 10,75,748/-. The Tribunal also relied on the precedent of the Hon'ble Kolkata High Court in PCIT v. REI Agro Limited (2022) for similar factual and legal propositions and directed the Assessing Officer to restrict the addition accordingly.

Conclusion: The disallowance under Section 14A read with Rule 8D is to be restricted to a net amount of Rs. 10,75,748/-, and the appeal is partly allowed in favour of the assessee.

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