2017 (11) TMI 2000 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - CIT excluding the value of investments not yielding exempt income in the year under consideration for computing the average value of investments as required for working of disallowance u/s 14A r.w.r 8D - Whether CIT(A) has erred in holding that earning of exempt income from investment in touchstone for making disallowance u/s 14A in-spite of fact that section 14A deals with disallowance of expenditure incurred in relation to income not includible in total income? - HELD THAT - As decided in case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT while calculating the disallowance as per Rule 8D(2)(ii) and 8D(2)(iii) the average value of investment is worked out by taking into account the investments in those shares only which have yielded tax free income to the appellant by way of dividend during the relevant period. As the issue is squarely covered by the Hon ble Delhi High Court in the case of Chem Investment (supra) we find no infirmity in the order of CIT(A) the appeal of the Revenue is dismissed.

Summary

Issues:
Only issue is the exclusion of value of investments not yielding exempt income relatable to exempt income under section 14A of the Income Tax Act.

Analysis:
The appeal by the Revenue challenges the order of the Commissioner of Income Tax (Appeals) regarding the exclusion of the value of investments not yielding exempt income for computing the average value of investments as required for working of disallowance under section 14A read with Rule 8D of the Income Tax Rules. The Revenue raised two grounds questioning the exclusion of such investments and the interpretation of section 14A. The assessee earned dividend income, and the Assessing Officer made disallowances under section 14A read with Rule 8D. The CIT(A) referred to a judgment of the Delhi High Court in the case of Cheminvest Ltd. and restricted the disallowance to investments yielding tax-free income. The total disallowance was reduced significantly. The Tribunal found no infirmity in the CIT(A)'s order as it was in line with the Delhi High Court's decision in Chem Investment. Therefore, the appeal by the Revenue was dismissed.

In conclusion, the Tribunal upheld the decision of the CIT(A) to exclude investments not yielding exempt income for the purpose of computing disallowance under section 14A read with Rule 8D. The Tribunal relied on the judgment of the Delhi High Court in the case of Cheminvest Ltd. to support the exclusion of such investments. The appeal by the Revenue was dismissed, and the CIT(A)'s order was upheld.