ACB India Ltd vs. ACIT (Delhi High Court)

DATE: March 24, 2015 (Date of pronouncement)
DATE: April 8, 2015 (Date of publication)
AY: 2008-09
FILE: Click here to download the file in pdf format
S. 14A & Rule 8D(2)(iii): In computing the “average value of investment”, only the investments yielding non-taxable income have to be considered and not all investments

The assessee reported tax exempt income of Rs. 18,26,360. The AO added back Rs. 19,96,242 under Section 14A. While doing so, the AO applied Rule 8D by taking into consideration the total quantum of interest other than that invested, under Section 14A in terms of Rule 8D, and arrived at the said figure after multiplying it with the result of the average value of investments and over average value of assets derived by him. The CIT(A) went into the record and found that the amount of investment attributable to dividend as on 31.3.2008 was Rs. 3,53,26,800, which constituted less than 1% of the total scheduled funds. He however accepted the basis of calculation applied by the AO and directed a disallowance of .05% of the amount determined to be average investment. The ITAT to which the revenue appealed, restored the AO’s determination holding it to be a true calculation in terms of Rule 8D. On appeal by the assessee HELD by the High Court:

The first condition for application of Section 14A was fulfilled as the AO expressed the opinion that a disallowance was warranted. In such eventuality the AO is required by the mandate of Rule 8D to follow Rule 8D(2). Clauses 1, 2 and 3 detail the methodology to be adopted. The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT(Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and thereafter arrive at the exact disallowance of .05%.

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