Only Investments that Yield Exempt Income to be considered for computing the disallowance u/rule 8D(2)(iii): ITAT

Only Investments yielding Exempt Income Considered for computing disallowance u/rule 8D(2)(iii): ITAT

The assessee has earned a dividend income of Rs. 22,09,778 and offered suo-moto disallowance of Rs. 2,92,220 being 0.5% of the average value of investments of Rs. 5,84,43,989. The assessee did not consider an investment in equity shares for the purpose of computing the average value of investments while computing the disallowance at 0.5% under Rule 8D(2)(iii). Not convinced with the submissions of the assessee the Assessing Officer computed the disallowance u/s 14A read with rule 8D at Rs. 8,12,891 comprising of interest disallowance under rule 8D(2)(ii) of Rs. 71,770 and disallowance under rule 8D(2)(iii) being 0.5% of average investments at Rs. 7,41,121. However, since the assessee himself disallowed Rs. 2,92,220 towards administrative expenses under rule 8D(2)(iii) the Assessing Officer restricted the disallowance to Rs. 5,20,671.

Appeal before CIT(A): On appeal the Ld. CIT(A) sustained the disallowance made by the Assessing Officer.

Appeal before ITAT: The tribunal observed that so far as the interest disallowance of Rs. 71,770 is concerned we observe from the balance sheet of the assessee that the assessee has opening capital and closing capital of Rs. 31.11 crores and Rs. 33.24 crores respectively which are far more than the investments of Rs. 11.62 crores at the beginning of the year and Rs. 19.09 crores at the end of the year. The ratio of the decision in the case of South Indian Bank Limited Vs. CIT squarely applies to the facts of the assessee’s case whereby it was held, that if investments in securities are made out of common funds and if non-interest bearing funds available with the assessee are more than the investments made in tax-free securities disallowance under section 14A cannot be made. Thus, the Tribunal deleted the disallowance of Rs. 71,770 made under rule 8D(2)(ii) towards interest.

The disallowance under rule 8D(2)(iii) being 0.5% of the average value of investment towards administrative expenses is concerned it was observed that the assessee contended that no dividend was received on the unquoted equity shares of Rs. 8,35,72,163 which stood at the beginning as well as at the end of the year and, therefore, we think that these are not to be considered as part of the average value of investments for disallowance at 0.5%. The Special Bench of ITAT Delhi in the case of ACIT vs. Vireet Investment Pvt. Limited, held that only those investments which yielded exemption income during the year are to be considered for computing the average value of investments for the purpose of disallowance under rule 8D(2)(iii). Relying on the decision, the AO was directed to exclude the unquoted equity shares of Rs. 8,35,72,163 for the purpose of considering the average value of investments and the consequential disallowance at 0.5% of such average investments.

Therefore, the appeal of the assessee was partly allowed.

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