Kirloskar Pneumatic Company Limited Vs DCIT (ITAT Pune)
Section 14A Disallowance Partly Set Aside; Mutual Fund Investments to Be Excluded from Rule 8D Computation
The Pune Bench of the Income Tax Appellate Tribunal (ITAT) adjudicated the assessee’s appeal for AY 2020-21 challenging a disallowance of ₹47.08 lakh under section 14A confirmed by the NFAC.
The assessee, a listed manufacturing company, had earned exempt income of ₹3.78 crore and had suo motu disallowed ₹2.58 lakh towards expenditure relating to such income. The Assessing Officer, after recording dissatisfaction with the assessee’s working, invoked Rule 8D and computed disallowance at 1% of annual average of monthly average investments, resulting in an additional disallowance of ₹47.08 lakh.
On appeal, the Tribunal held that the Assessing Officer had duly recorded satisfaction as required under section 14A(2), in line with the Supreme Court ruling in Maxopp Investment Ltd., and therefore invocation of Rule 8D was legally valid.
However, on the quantum of disallowance, the ITAT accepted the assessee’s contention that a substantial portion of exempt income arose from mutual fund investments, which are professionally managed, and for which portfolio management fees are already embedded. The Tribunal observed that no further substantial administrative effort is required from the assessee for such investments.
Since the exact bifurcation between mutual fund investments and other investments (such as equity shares) was not examined by the Assessing Officer, the ITAT set aside the matter to the AO with a specific direction to:
