ITAT Remands S. 14A Disallowance on Mutual Fund Investments for Fresh Verification, partly allowing Kirloskar Pneumatic’s Appeal [Read Order]

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has restored the issue of disallowance under Section 14A of theIncome Tax Act, 1961 to the Assessing Officer, partly allowing an appeal by Kirloskar Pneumatic Company Limited.

It was further held that investments made in mutual funds require a different treatment while computing disallowance under Rule 8D.

The dispute for the assessment year 2020-21 arose from a scrutiny where the Assessing Officer noted that the assessee had earned exempt income of over ₹3.78 crore and had suo motu disallowed ₹2.58 lakh under Section 14A.

The AO invoked Rule 8D and computed disallowance at 1%, resulting in an additional disallowance of ₹47.08 lakh. This was confirmed by the National Faceless Appeal Centre.

Before the Tribunal, the assessee contended that the Assessing Officer had failed to record proper satisfaction as mandated under Section 14A(2) before invoking Rule 8D. They further argued that the major portion of exempt income arose from investments in mutual funds, which are professionally managed. Reliance was placed on the Supreme Court decision in Maxopp Investment Ltd. v. CIT.

The Tribunal, comprising Vinay Bhamore (Judicial Member) and Manish Borad (Accountant Member), examined the assessment order and held that the Assessing Officer had recorded sufficient satisfaction after analysing the nature and volume of investments. However, on the issue of quantum, the Bench observed that investments in mutual funds are managed by fund managers for which fees are charged, and therefore the extent of expenditure incurred may be lower.

As a result, the Tribunal restored the matter to the file of the Assessing Officer. The Assessing Officer was directed to verify the details of investments and recompute the disallowance under Rule 8D after excluding investments made in mutual funds.

Accordingly, the appeal was partly allowed and the impugned order was set aside to such extent.

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