No Additional Disallowance under Rule 8D(2)(ii) of Income Tax Rules if Calculated Amount is Lower than Suo Motu Disallowance: ITAT [Read Order]

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) held that no additional disallowance under rule 8d(2)(ii) of Income Tax Rules, 1962, if the calculated amount is lower than suo motu disallowance.

The assessee, a limited company, declared income of ₹116,39,31,340/- in its return of income for Assessment Year 2018–19 filed on 31.03.2019. During the assessment proceedings, the Assessing Officer invoked Rule 8D(2)(ii) of the Income Tax Rules, 1962, which provides for computation of disallowance under Section 14A at 1% of the annual average of the monthly average of the opening and closing balances of the value of investments, and determined the disallowance at ₹2,43,81,472/-.

The Assessing Officer, while computing the disallowance, granted set-off of the suo motu disallowance of indirect expenses amounting to ₹6,62,352/- offered by the assessee, and accordingly made a net disallowance under Section 14A of ₹2,37,19,120/-, thereby assessing the total income at ₹118,76,54,060/-.

The counsel for the assessee submitted that a substantial portion of the average investments comprised investments in mutual funds and tax-free bonds, and that in the case of mutual fund investments, asset management companies charge periodic fees for managing, switching, and optimizing investments across various funds to maximize returns, thereby covering the relevant expenditure.

The counsel for the assessee further contented ought to have appreciated that application of Rule 8D of the Income Tax Rules. 1962, in past years in Assessee's own case does not affirm its application automatically in subsequent years, especially having regard to the fact that the manner in which disallowance is suo-moto computed by the Assessee for the year under consideration is more comprehensive as compared to the manner in which the same was being computed in the earlier years.

The Tribunal comprising Dr. Manish Borad, Accountant Member, and Shri Pavan Kumar Gadale, Judicial Member, held that for the purpose of computing disallowance under Rule 8D(2)(ii) of the Income Tax Rules, 1962, the Assessing Officer is directed to restrict the computation to 1% of the annual average of the monthly average of the opening and closing balances of investments, excluding investments made in mutual funds and tax-free bonds.

“We also want to make it clear that in case the calculation under Rule 8D(2)(ii) of the Income Tax Rules, 1962, does not exceed the suo motu disallowance of indirect expenses made by the assessee, then no further disallowance deserves to be made under Rule 8D(2)(ii) of the Income Tax Rules, 1962, and in case it exceeds then the assessee should be allowed the deduction for the indirect expenses suo motu offered for disallowance” the Bench noted.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates