Rs 5.5 Crore 14A Disallowance Cut Down to Rs 1.16 Cr: ITAT Favors Assessee on Rule 8D Misuse

Rs 5.5 Crore 14A Disallowance Cut Down to Rs 1.16 Cr: ITAT Favors Assessee on Rule 8D Misuse

The assessee, a statutory financial institution engaged in promoting and financing micro, small, and medium enterprises, filed returns for multiple years. During scrutiny, the Assessing Officer made additions on four counts, disallowance of bad debts u/s 36(1)(vii), amortised rent (Rs. 60,79,783), disallowance u/s 14A (Rs. 5,50,86,”192 after invoking Rule 8D), and restriction of deduction u/s 36(1)(viii) to Rs. 71,75,94,432.

On appeal, the CIT(A)/NFAC deleted additions on bad debts and special reserve deduction, partly sustained Rs. 50 lakh under Section 14A, and rejected the lease-premium claim. Both the assessee and the revenue approached the Tribunal.

Issue Raised: Whether deduction under Sections 36(1)(vii), 36(1)(viia)(c) and 36(1)(viii) should be restricted inter-se or treated as independent; whether the AO was justified in invoking Rule 8D without recording satisfaction under Section 14A(2); and how the claim for amortised lease-premium is to be dealt with pending Section 158A declaration.

ITAT’s Decision: The Tribunal found no error in CIT(A)’s order allowing deduction u/s 36(1)(vii). It was observed that both Sections 36(1)(vii) and 36(1)(viia)(c) provide separate reliefs, one for actual write-off, the other for statutory provision, and the legislative intent does not restrict a bank or financial institution from claiming both. Accordingly, the Revenue’s grounds were dismissed. Regarding deduction u/s 36(1)(viii), the Bench held that each clause of Section 36(1) is self-contained; hence, the AO was incorrect in reducing the deduction claimed under Section 36(1)(viia)(c) while computing profits eligible under Section 36(1)(viii). This view was supported by consistent past orders in the assessee’s own cases.

For Section 14A, the Tribunal noted that the AO had not recorded any objective dissatisfaction with the assessee’s books before applying Rule 8D. Following earlier year precedents, it directed the AO to restrict the disallowance to the assessee’s own suo-motu computation of Rs. 1,16,75,281 and deleted the ad hoc enhancement upheld by CIT(A). As regards the lease-premium paid to MMRDA, the Tribunal recorded that the assessee had filed Form-8 under Section 158A and ordered the AO to verify and act after the High Court’s final decision on the identical question of law.

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