Word Annual Denotes 12 Months: ITAT Clarifies Rule 8D(2)(ii) Calculation Methodology

Radiant Life Care Pvt. Ltd. Vs DCIT (ITAT Mumbai)

In the case of Radiant Life Care Pvt. Ltd. Vs DCIT, the assessee challenged the disallowance of ₹1.5 crore under Section 14A of the Income Tax Act. The Assessing Officer (AO) applied Rule 8D(2)(ii) to calculate disallowance, dividing the monthly averages of the opening and closing balances of investments by six, as the securities were held for only six months. The assessee, however, argued that the annual average should be computed by dividing the aggregate of the monthly averages by twelve, consistent with the standard interpretation of the term “annual.” Both the AO and the Commissioner of Income Tax (Appeals) upheld the disallowance, prompting the assessee to appeal to the ITAT.

The ITAT, referring to a Supreme Court judgment on the term “annual,” ruled in favor of the assessee. The Tribunal emphasized that “annual” denotes a twelve-month period and that dividing by six, as the AO did, led to inconsistent results. It also highlighted the inherent flaw in the AO’s approach using an illustration, where disallowances under the AO’s method yielded identical results for investments held for differing durations, which contradicted the principle of proportionate disallowance. Consequently, the ITAT directed the computation to align with the established interpretation of Rule 8D, ensuring logical and equitable treatment of the assessee’s investments.