No Disallowance u/s 14A on Tax Free Bonds: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), New Delhi Bench held that No disallowance under Section 14A of the Income Tax Act, 1961 on tax free bonds.

The Assessing Officer (AO) noted that assessee, Sarva Haryana Gramin Bankhas made investment in tax free bonds or debentures, mutual funds, shares etc. which yielded tax free dividend and tax-free interest and exempted long term capital gain totalling to Rs.3,87,57,264.25. That against this exempted income, the assessee has made disallowance of expenses under Section 14A of the Income Tax Act amounting to Rupees eighteen lakhs.

The AO enquired about the computation of disallowance under Section 14A. After the submissions of the computation by the assessee, AO was not satisfied. He proceeded to invoke the provisions of Rule 8D of the Income Tax Rules, 1962 and made disallowance under Section 14A read with Rule 8D(2)(ii) amounting to Rupees two crores and under Rule 8D(2)(iii) amounting to Rupees twenty-two lakhs.

In the appeal, the CIT(A) concluded that the AO has rightly invoked the provisions of section 14A and computed the disallowance as per Rule 8D and that there is no anomaly in the order of the AO. Hence the present appeal has been preferred.

The Counsel for the assessee, submitted that the assessee has sufficient interest free funds to make investment in tax free bonds or debentures or mutual funds or shares etc. and bank has not incurred any interest expenditure.

A Bench consisting of Shamim Yahya, Accountant Member and Anubhav Sharma, Judicial Member placed reliance on the judgment in Maxopp Investment Ltd, wherein it was held that “The proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds or securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.”

To Read the full text of the Order CLICK HERE

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