Relief for Air India: ITAT directs Use of Average Value u/r 8D for Accurate Investment Calculation, Replacing AO's Market Value Approach [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) granted relief for Air India by directing the Assessing Officer (AO) to use the Average Value of Investment to recalculate disallowance under Rule 8D of the Income Tax Rules replacing the assessing officer (AO)’s market value approach.

Air India Limited (assessee), a resident corporate entity, filed an Income Tax Return (ITR) on 15.02.2021. Later, the assessee filed a revised ITR on 31.03.2021 declaring loss under the heads business and capital gain.

The Assessing officer (AO) observed that the assessee received an exempt income of Rs. 4,58,77,493. Therefore, the AO issued notice to the assessee for disallowance of the income under section 14A read with rule 8D. The assessee submitted that these investments were made out of their own funds.

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The AO was not convinced by the submissions of the assessee and observed that the exempt income could not be earned unless there was an expenditure. Therefore, the AO computed a disallowance of Rs. 68,22,862, by applying the methodology provided under rule 8D.

Aggrieved by the order of the AO, the assessee filed an appeal before the National Faceless Appeal Centre (NFAC).  However, the appeal was dismissed by the NFAC. Therefore, the assessee filed an appeal before the ITAT.

The counsel for the assessee submitted that the AO made a computation error. The counsel further contended that the AO computed disallowance based on the Market Value of the investments instead of using the average value of the investment.

The counsel highlighted the provision of rule 8D which provided for the use of the average value of market investment and needs to be worked out @1% to 66,11,815. The counsel submitted that the amount of disallowance should be restricted to Rs. 66,11,815.

On the other hand, the counsel for the revenue relied on the findings and observations of the AO and NFAC. Therefore, the counsel sought to dismiss the appeal.

The tribunal bench, comprising Saktijit Dey (Vice President) and Renu Jauhri (Accountant Member), observed the provision of rule 8D, which provides for computing the disallowance at 1% based on the average value of investments.

The tribunal observed that the assessee limited its grievance to the computation of disallowance under Rule 8D(2)(ii), explaining that it should be based on the average value of investments that generated exempt income during the relevant year. The tribunal referenced its earlier decision in the assessee’s case for A.Y. 2017-18 and confirmed the correct average value of investments giving rise to exempt income was Rs. 66,11,81,530.

So, the tribunal directed the A.O. to calculate the disallowance at 1% of the average investment value, amounting to Rs. 66,11,815, and to restrict the disallowance to this amount. The tribunal partly allowed the appeal for statistical purposes.

To Read the full text of the Order CLICK HERE

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