Section 14A computation: disallowance under Rule 8D(2)(ii) to exclude mutual funds and tax-free bonds from investment base.

Rule 8D(2)(ii) disallowance under section 14A was to be recomputed by excluding mutual funds and tax-free bonds from the investment base used to determine indirect expenditure relatable to exempt income. The Tribunal accepted the assessee's contention on the computation method, and directed the jurisdictional Assessing Officer to verify the revised figure after giving a reasonable opportunity of hearing. It further clarified that if the recomputed disallowance does not exceed the assessee's suo motu disallowance, no additional disallowance is to be made.

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Issues: Whether the disallowance under section 14A read with Rule 8D(2)(ii) of the Income Tax Rules, 1962, had to be recomputed by excluding investments in mutual funds and tax-free bonds from the value of investments for determining the indirect expenditure relatable to exempt income.

Analysis: The Tribunal held that Rule 8D(2)(ii) requires disallowance at 1% of the annual average of the monthly average of the opening and closing balances of the value of investments yielding exempt income, but accepted the assessee's contention that, on the facts, mutual funds and tax-free bonds should be excluded from the computation base. The Tribunal further directed verification by the jurisdictional Assessing Officer after giving the assessee a reasonable opportunity of hearing, and clarified that if the recomputed figure does not exceed the assessee's suo motu disallowance, no further disallowance is to be made.

Conclusion: The disallowance under Rule 8D(2)(ii) was directed to be recomputed excluding mutual funds and tax-free bonds, with relief limited to the extent indicated by the Tribunal.

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