Disallowance Computed under Rule 8D(2)(ii) of Income Tax Rules should not Exceed Exempt Income so Earned: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Lucknow Bench, held that the disallowance computed under Rule 8D(2)(ii) of the Income Tax Rules , 1962 should not exceed exempt income so earned.

The facts concerned in this case are that the assessee, Rohit Real Estates Pvt Ltd, was selected for ‘limited scrutiny’ through Computer Assisted Scrutiny System (CASS) to examine and verify the expenses incurred for earning exempt income. The Assessing Authority did not accept the explanation given by the assessee that it had not incurred any expenditure for earning the exempt income.

The CIT(A) sustained the addition made by the lower authority and dismissed the appeal of the assessee. The assessee-appellant submitted that the CIT(A) had erred in upholding the disallowance that had been made in regular assessment order dated 28.08.2019 by applying Section 14 of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

The counsel for the appellant submitted before the ITAT that the disallowance computed by Assessing Officer (AO) is much higher than such exempt income, which is impermissible by law. It was also submitted that the law mandates recording of proper satisfaction by the AO as to why the suo-moto disallowance made by the assessee is not correct.

The AO computed disallowance at INR 2,57,458/-. ITAT observed that some of the cases relied upon by the assessee-appellant deserve merit, this was the ruling in Nirved Traders Ltd v. Dy. CIT (2019) where it was held that disallowance computed under Rule 8D(2)(ii) should not exceed the exempt income so earned.

The bench of Anadee Nath Misshra (Accountant Member) and Kul Bharat (Vice President) directed the Assessing Officer to restrict the disallowance to the extent of the exempt income, i.e., INR 31,070/-. The appeal was partly allowed.

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