Section 14A, Rule 8D — Exercising jurisdiction in the larger interest of justice, ITAT directed the AO to compute disallowance u/s.14A @ 2% of the exempt income instead of 4.06% as computed by the AO.

The assessee involved in business of investments and dealing in shares, securities, filed its return declaring total income of Rs.14,60,52,720. In the said return it had shown dividend income of Rs. 76,49,289 as exempt income. In response to the show-cause notice issued by the AO as to why expenses in relation to earning of dividend income should not be disallowed, the assessee explained that it had not incurred any direct expenditure. The AO rejected this contention and computed the disallownce to be Rs.4,36,027 i.e., 4.06% of dividend income.

Aggrieved the assessee preferred an appeal to the CIT(A) who directed the AO to recompute the disallowance by following Rule 8D of the Incometax Rules, 1963.

 Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was contended that for the assessment year under consideration, Rule 8D is not applicable and that the Tribunal by exercising jursidiction u/s.254(1) of the Act, should determine the reasonable expenditure in peculiar circumstances of the case.

Held:

The Tribunal held that the CIT(A) was not correct in directing the AO to recalculate the disallowance by following Rule 8D. Keeping in view the fair statement of the AR as well as exercising jurisdiction in the larger interest of justice, the Tribunal directed the AO to compute the disallowance @ 2% of the exempt income instead of 4.06% which the Tribunal felt should meet the ends of justice.