Investments Which Yielded Exempt Income Can Only Be Considered For Purpose Of Disallowance U/s 14A R/w Rule 8D: Mumbai ITAT

Quoting the decision of cargo motors private limited versus deputy Commissioner of income tax (145 taxmann.com 641), the Mumbai ITAT reiterated that for purpose of making disallowance of expenses u/s 14A as per rule 8D, only those investments were to be considered which yielded exempt income during the year.

The Bench comprising Rahul Chaudhary (Judicial Member) and Prashant Maharishi (Accountant Member) observed that, “the assessee has more interest free funds available with it in the form of share capital and reserves and surplus then the amount of investment made which yielded tax free income during the year. Therefore, the presumption would be available in favour of the assessee that amount of investment made in such exempt income yielding investments are made of interest free funds available. Therefore, there could not have been any disallowance under rule 8D (2) (ii)of the income tax rules 1962 under section 14 A of the Act.” (Para 13)

As per the brief facts of the case, the assessee filed its return of income at the business loss under the normal provisions of the income tax act and book profit was computed. The return was selected for scrutiny, wherein disallowance u/s 14A read with rule 8D was made by AO as per the normal computation of total income and further the identical amount was also added under the book profit computed u/s 115JB. The CIT (A) passed an appellate order wherein the disallowance u/s 14A was restricted, disallowance to the extent of exempt income while computing income as per normal computation and further while computing the book profit, he restricted the addition as same was offered by the assessee and agreed.

The Assessee sought for relief that only those investments which have yielded exempt income during the year should be considered for the purpose of disallowance and further when the assessee has own funds which are more than the value of the investment the disallowance of interest under rule 8D (2) (ii) cannot be made.

The Coram noted that assessee has earned exempt income during the year and on its own has made the disallowance u/s 14A in the return of income in normal computation of total income.

The Bench found that such disallowance was based on the salary of certain executives along with certain conveyance expenses, telephone printing and stationery expenses along with the business support services based on the man hours in relation to the portfolio management for earning the exempt income.

Therefore, referring to the decision of Supreme Court in case South Indian bank Ltd versus CIT 130 taxmann.com 178, the ITAT allowed assessee's appeal and directed the AO to delete the disallowance.

Counsel for Appellant/ Taxpayer: Jitendra Sanghavi

Counsel for Respondent/ Department: Sanyogita Nagpal

Case Title: Reliance Power Ltd verses The Deputy Commissioner of income tax

Case Number: ITA No. 3043/Mum/2023&ITA No 3424/M/2023

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