The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. The Hon’ble Tribunal in I.T.A. No.3349/Del/2011 in the case of Promain Ltd., after relying upon a Kolkatta judgment of Tribunal in I.T.A. No.1331 has held that strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The Tribunal had relied upon the findings of Kolkatta Tribunal in the case of Rei Agro Ltd. v. DCIT in I.T.A. No. 1331/Del/2011 dated 29.7.2011. The relevant portion of Tribunal findings as contained in the Kolkatta Tribunal are reproduced below:-
“(iii) Further in Rule 8D(2)(ii), the words used in numerator B are “the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance sheet as on the first day and in the last day ofthe previous year’. The Assessing Officer was wrong in taking into consideration the investment of ~.103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus,. It is not the total investment at all beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part ofthe total income which is to be considered. The term “average of the value of investment” is used to take care of cases where there is the issue of dividend striping.
iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to percentage of the average value of investment the income from which does not or shall not form part of the total income/. Thus, under sub clause (iii), what is disallowed is percentage ofthe numerator B in Rule 8D(2)Iii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in the Rule 8D(2)(ii). Thus, not all investments become the subject matter of consideration when computing disallowance u/s 14A read with Rule 8D. The disallowance u/s 14Aread with Rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (A.L.) (I.T.A. 1331/Kol/2011 dated 29.7.2011.”
Following the above judicial precedents, we held that value of strategic investments should be excluded for the purpose of disallowance under Rule 8D)iii) facts, we direct the Assessing Officer to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance.
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