The Income Tax Appellate Tribunal (ITAT) Bangalore bench, while directing readjudication in respect of exempt income observed that disallowance under Rule 8D(2)(iii) of the Income Tax Rules should be made on basis of average value of those investments in which assessee has yielded exempt Income.
Assessee, Manipal Education is engaged in the business of providing engineering asset management and maintenance service. After filing the return of income assessee’s case was selected for scrutiny.
AO noted that the company has made non-current investments in equity shares and current investments. The company received dividend income on current investments of Rs. 1,25,63,095/- which is exempt income under the Income Tax Act.
Hence the AO applied Section 14A of the Income Tax Act and observed that the assessee has not reported any expenditure attributable to investment made to earn such exempt income.
Therefore the assessee was asked to provide a note on applicability of Section 14A along with computation of disallowance under Rule 8D of Income Tax Rules.
In response the assessee furnished working of disallowance under Section 14A at 0.5% of average investment amounting to Rs.27,36,547 and submitted that the dividend income was earned on shares & mutual funds claimed as exempt under Section 10(34) & 10(35) of the Income Tax Act and these investments were made out of own funds, therefore no disallowance was warranted under Section 14A of the Income Tax Act.
Thus the AO examined the issue in the light of Section 14A and found that the assessee has not satisfied correctness of expenditure relating to earning of exempt income.
Then AO proceeded to calculate disallowance & considered the entire average value investments and accordingly calculated the disallowance as per Rule 8(2)(iii) at Rs.27,36,547/-.
Aggrieved against the order, the assessee filed an appeal before the CIT(A), who dismissed the appeal. Thereafter the assessee filed appeal before the tribunal.
During the proceedings before the bench S.K. Tulsiyan, counsel for assessee submitted that the Assessee has made the investments from sufficient ‘interest free’ own funds, evident from the Balance Sheet of the Assessee.
Assessee has received dividend income only on the current investments which is clear from the audited financial statements. No exempt income was received on the non current investments.
Dr. Satyasai Rath, Counsel for the revenue supported the decision of the lower authorities.
It was observed by the tribunal that the AO has made disallowance under Rule 8D(2)(iii) on the entire average value of current and non-current investments, whereas as per Rule 8D(2)(iii), disallowance can be made only on such investments which has yielded exempt income.
Further assessee has received dividend income only on current investments. Moreover the dividend is earned on equity shares and mutual funds, but in the computation of disallowance submitted before tribunal only the average value of investments made in mutual funds has been considered.
It was also determined that the disallowance under Rule 8D(2) (iii) should be made on the basis of average value of those investments in which the assessee has yielded exempt income.
After considering the facts submitted by both parties, the two member bench of Laxmi Prasad Sahu(Accountant Member) and George George K (Vice President) remitted this issue to the file of the AO for fresh computation of disallowance under Rule 8D(2)(iii) in terms of the judgment of Delhi High Court in the case of Cargo Motors (P.) Ltd. v. Deputy Commissioner of Income-tax.
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