ITAT Replaces Rule 8D with Reasonable Estimate, Cuts ₹3.05 Cr Disallowance to ₹10 Lakh

Nitin Dwarkadas Nyati Vs ACIT (ITAT Pune)

Assessee, a builder & civil contractor, filed return declaring income of ₹36.73 crore. AO completed assessment u/s 143(3) r.w.s. 144B determining income at ₹40.41 crore after two additions —

(i) ₹3.05 crore u/s 14A r.w.r. 8D for expenditure relatable to exempt income, &

(ii) ₹50.79 lakh towards education cess, treating the same as not allowable in view of retrospective amendment by Finance Act 2022.

CIT(A) partly allowed the appeal — restricted the 14A disallowance by directing AO to recompute @1% on those investments from which exempt income was earned, but confirmed the cess disallowance.

Before Tribunal, Assessee argued that:

• He maintains separate books for two proprietary concerns — Nyati Housing & Nyati Consultants & Engineers; out of total administrative expenses of ₹6.32 crore, ₹5.48 crore relates to Nyati Housing which has no investments at all, hence no disallowance should be made on that portion.
• Out of the remaining ₹1.06 crore in personal books, ₹50.79 lakh was education cess (already disallowed), ₹23.25 lakh depreciation, ₹2.58 lakh insurance, ₹12.78 lakh property tax — none related to exempt income.
• Exempt income comprised profit from firms/AOPs ₹4.10 crore, dividend ₹78,350 & PPF interest ₹1.06 lakh.
• No satisfaction was recorded by AO regarding correctness of claim; hence no disallowance warranted.

Tribunal observed that CIT(A) himself accepted separate books for Nyati Housing with no investments, hence administrative expenses of ₹5.48 crore deserved exclusion from 14A computation. It also found that certain expenses like education cess, depreciation, insurance & property tax had no nexus with earning exempt income. However, for some residual expenses, nexus could not be ruled out completely.