Setback to AAI: ITAT Directs Recalculation of Exempt Income Disallowance u/r 8D at 1%, Rejecting Sufficient Interest-Free Funds Claim [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) directed the recalculation of exempt income disallowance under Rule 8D at 1%, rejecting the Airport Authority of India (AAI)’s claim of sufficient interest-free funds.

Airport Authority of India (assessee) filed an Income Tax Return declaring dividend income of Rs. 19,65,60,000 which was claimed as exempt income. The Assessing officer (AO) asked the assessee to furnish details of expenditure. The assessee filed a reply that the dividend income was received of Rs. 19. 66 crores from GHAIL and the same amount was claimed as exempt income.

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The assessee also submitted that there was a total interest-free fund of Rs. 14,270 crores. The assessee claimed before the AO that the investment was made from their own funds and therefore no disallowance can be made under section 14A read with Rule 8D.

Despite the submissions, the AO computed a disallowance of Rs. 17,15,47,000 as per the formula stated under Rule 8D of the Income Tax Rules. Aggrieved by the order of AO, the assessee filed an appeal before the Commissioner of Income Tax (appeals) [CIT(A)].

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The CIT(A) observed that the assessee had sufficient interest-free funds which was more than the investment made. The CIT(A) relied on the judgement of the Supreme Court in the case of South Indian Bank Ltd v. CIT and deleted the disallowance made by the AO. Aggrieved by the order, the revenue filed an appeal before the ITAT.

The tribunal comprising Mahavir Singh (Vice President) and S. Rifaur Rahuman (Accountant Member) observed that the provision of Rule 8D was amended in 2016. The tribunal observed that the Rule 8D laid down for computation of disallowance based on the average investment value at 1%.

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The tribunal also observed the Judgment of the Special Bench of Delhi Tribunal in the case of ACIT v. Vireet Investments, which held that the AO should only take instruments that give rise to exempt income. 

Therefore, the tribunal set aside the CIT(A) order and remanded the issue back to the AO. The tribunal also directed the AO to calculate the disallowance by taking those investments that give rise to exempt income at 1% on the average value of the investment. The appeal of the revenue was allowed for statistical purposes.

To Read the full text of the Order CLICK HERE

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