Dividend bearing Securities should be considered for Disallowance under Rule 8D(2)(iii) of the Income Tax Rules says ITAT in PwC case

The Income Tax Appellate Tribunal (ITAT) in the PwC case held that dividend-bearing securities should be considered for disallowance under Rule 8D(2)(iii) of the Income Tax Rules.

The appellant PricewaterhouseCoopers Private Limited is in the business of providing, inter alia, management consultancy services, and also accounting and business advisory services. The Company’s operations are segregated into different lines of services like advisory, taxation services. The assessee provides both onshore as well as offshore services in the wide areas of Consulting, Deals, Forensic Services, Government Reforms and Infrastructure Developments (GRID), Accounting Advisory, Risk Advisory Services, Tax, and Regulatory Services.

The Company filed a revised return of income determining total income. During the Assessment Year under consideration, the AO, pursuant to the Directions of the Dispute Resolution Panel (DRP) passed the final assessment order under section 143(3) read with Section 144C/144C(5) of the Income-tax Act, 1961 wherein adjustments/variations were made, thereby computing the total assessed income.

During the year under consideration, the assessee earned exempt dividend income amounting to Rs. 21.01 crores from PricewaterhouseCoopers Service Delivery Centre (Kolkata) Pvt. Ltd. (PwC SDC) which is exempt under Section 10(34) of the Act. The Company voluntarily disallowed a sum of Rs. 30,000/- under section 14A of the Act in the computation of total income, being expenditure attributable to earning of such exempt income and same is also certified by a Chartered Accountant, which is reported in clause 21(h) of the tax audit report for the assessment year under consideration.

AO ignored the contention of the assessee and arrived at an amount for disallowance under Section 14A of the Act by applying the formula provided in Rule 8D of the Income-tax Rules. Since the assessee had already offered to tax Rs. 30,000/- as expenses incurred towards earning exempt income, the AO added back a further amount.

The assessee raised the issue that on the facts and in law and in the circumstances of the case, the DRP/AO erred in making a disallowance under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules 1962 as against the disallowance made by the appellant in the Return of Income.

The ITAT consists of a Judicial Member S. Godara and an Accountant Member A. L. Saini held that dividend-bearing securities should be considered for disallowance under Rule 8D(2)(iii) of the Income Tax Rules.

“Therefore, we direct the assessing officer to compute the disallowance under Rule 8D(2)(iii) of the Rules by taking into account dividend-bearing securities only. For statistical purposes, the grounds raised by the assessee are allowed,” the tribunal said.