ITAT deletes disallowance on Expenditure incurred in relation to income not includible in Total Income:ITAT

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, while granting relief to the IDBI Bank deleted the disallowance on expenditure incurred in relation to income not includible in total income.

Facts of the case:-

The assessee, IDBI Bank has received an amount of Rs.131,15,55,304 as dividend from shares of financial institutions, companies, subscription to Venture/Mutual Funds and on investment in shares in the secondary market. It claimed this income as exempt under section 10(34) of the Act. Also during the year, the assessee received interest income of Rs.84,68,39,275 from investment in tax-free bonds, which it claimed as exempt under section 10(15) of the Act.

Interpretation of law:-

The AO asked the assessee to furnish details of dividend income earned and expenses incurred as per provisions of section 14A read with Rule 8D of the Income Tax Rules, 1962. The AO was not convinced with the reply computed the disallowance under section 14A read with Rule 8D at Rs.279,23,59,048; the break-up being Rs.259,40,87,271 under Rule 8D(2)(ii) and Rs.19,82,71,777 under Rule 8D(2)(iii). As the assessee had added back Rs.2,22,63,226 towards expenses incurred for earning exempt income, the AO made an addition of the balance amount of Rs.2,77,00,95,822. The CIT(A) directed the AO to verify the revised computation made in respect of disallowance under Rule 8D(2)(iii) at Rs.15,35,60,175/- and allow appropriate relief to the appellant.”

The assessee submitted that there was no objective satisfaction recorded by the AO as to why the computation mechanism provided under Rule 8D(2) of the Rules would come into operation, having regard to the accounts of the assessee.

Conclusion:-

The coram noted that the AO has not recorded any objective satisfaction as to why the computation mechanism provided in Rule 8D(2) of the Rules would come into operation, having regard to the accounts of the assessee. To follow the reasons as recorded for earlier years, as done by the AO in the impugned assessment year, is definitely not an objective satisfaction. Therefore, the tribunal set aside the order of the CIT(A) in respect of disallowance under section 14A read with Rule 8D(2)(iii).

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