2016 (4) TMI 1418 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Quantum of disallowance - AO noticed by the AO that the assessee has earned dividend income on investment made and the same is claimed to be exempt from tax - assessee disputed the quantum of disallowance worked out by the AO as per rule 8D by submitting that only the investment on which the exempt income was actually earned by the assessee during the year under consideration should be taken into consideration and not the entire investment as done by the AO - HELD THAT - As per decision of REI Agro Ltd. 2013 (9) TMI 156 - ITAT KOLKATA wherein it was held that for computation of disallowance section 14A by applying Rule 8D(2)(ii) only those investments shall be considered which earn exempt income and not the total investment appearing in the balance-sheet. Respectfully following the said decision we direct the AO to recompute the disallowance to be made under section 14A by applying Rule 8D after taking into consideration only the investment which actually earned the exempt income and not the entire investment. Appeal filed by the assessee is partly allowed. -

Summary

Issues: Disallowance under section 14A of the Income-Tax Act, 1961 read with rule 8D of Income-Tax Rules 1962

In this case, the assessee, an individual, filed an appeal against the order of the ld. CIT-XXIV confirming the disallowance of &8377; 74,272 made by the AO under section 14A for the assessment year 2008-09. The AO disallowed the amount as the assessee earned dividend income claimed to be exempt from tax without offering any expenses incurred in relation to earning the exempt income as required by section 14A. The AO applied rule 8D to compute the disallowance. The average value of investments not forming part of total income was considered, resulting in a disallowance of &8377; 74,272.

On appeal, the ld. CIT(A) upheld the disallowance under section 14A read with rule 8D. The assessee then appealed to the Tribunal. The Tribunal considered the applicability of section 14A and rule 8D, and the quantum of disallowance. The assessee argued that only investments earning exempt income during the year should be considered for disallowance, citing a precedent where it was held that only such investments should be included, not the total investment. The Tribunal agreed with this argument and directed the AO to recompute the disallowance under section 14A by considering only the investments that actually earned exempt income, not the entire investment portfolio.

Therefore, the Tribunal partly allowed the appeal, directing the AO to recalculate the disallowance under section 14A by applying Rule 8D based on investments that generated exempt income. The decision was pronounced in the open court on 22nd April 2016.