The officer took my whole investment portfolio into the Rule 8D average. Should it not be only the investments that gave exempt income?
Only the investments whose income does not form part of total income go into the average. The Delhi High Court set aside a computation in which the Assessing Officer, instead of adopting the average value of tax exempt investments, factored in the total investment — here Rs 38,61,09,287 in place of Rs 3,53,26,800.
Decided by the High Court (S. Ravindra Bhat J and R.K. Gauba J (judgment delivered in open court by S. Ravindra Bhat J)) on 2015-03-24, reported as ITA 615/2014 (High Court of Delhi). It bears on section 14A, section Rule 8D of the Income Tax Act 1961, in Deductions & Disallowances, Capital Gains Exemptions and Assessment & Scrutiny matters.
This is the single most common arithmetic error in a Rule 8D order and it is usually worth more than the legal grounds. The point survives the substitution of Rule 8D from 2 June 2016, because the substituted clause (ii) is still expressed as a percentage of the value of investment 'income from which does not or shall not form part of total income' — that wording is reproduced verbatim at para 45 of the Supreme Court's judgment in CIT v. Essar Teleholdings Ltd. What has changed is the rate and the base: half a per cent of the opening and closing average under the old rule, one per cent of the annual average of the monthly averages of the opening and closing balances under the new one, capped at total expenditure claimed. Also worth noting: the Court held that the Commissioner (Appeals), having noticed the correct figure, could not decline to correct the error and 'apply his own equity' instead.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, mainly engaged in coal preparation, beneficiation, transportation and loading of coal, reported tax exempt income of Rs 18,26,360 for AY 2008-09 among other heads. The Assessing Officer added back Rs 19,96,242 under s.14A, applying Rule 8D by taking into consideration the total quantum of interest and arriving at that figure after multiplying it with the result of the average value of investments over the average value of assets. The Commissioner (Appeals) went into the record and found that the amount of investment attributable to dividend as on 31 March 2008 was Rs 3,53,26,800, which was less than one per cent of the total scheduled funds; he nonetheless accepted the officer's basis of calculation and directed a disallowance computed on the average investment. The Tribunal, on the Revenue's appeal, restored the Assessing Officer's determination as a true calculation in terms of Rule 8D.
The findings of the Tribunal and the lower authorities were set aside, the appeal allowed, and the matter remitted to the Assessing Officer to work out the tax effect after giving due notice to the assessee (para 5). The error was that the Assessing Officer factored in the total investment instead of the average value of investment the income from which does not form part of the total income (para 4).
Having reproduced Rule 8D(1) to (3) in full, the Court held that the Assessing Officer, instead of adopting the average value of investment of which income is not part of the total income — that is, the value of tax exempt investment — chose to factor in the total investment itself. The Commissioner (Appeals), even though he had noticed the exact value of the relevant investment, did not correct the error but chose to apply his own equity; on the record he was bound to substitute the figure of Rs 38,61,09,287 with the figure of Rs 3,53,26,800 and then arrive at the disallowance at the prescribed percentage (para 4).
The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself.
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Handle my notice → Ask a CA on WhatsAppOnly the investments whose income does not form part of total income go into the average. The Delhi High Court set aside a computation in which the Assessing Officer, instead of adopting the average value of tax exempt investments, factored in the total investment — here Rs 38,61,09,287 in place of Rs 3,53,26,800. This was decided by the High Court (S. Ravindra Bhat J and R.K. Gauba J (judgment delivered in open court by S. Ravindra Bhat J)) and bears on section 14A, section Rule 8D of the Income Tax Act 1961. It is reported as ITA 615/2014 (High Court of Delhi). This is the single most common arithmetic error in a Rule 8D order and it is usually worth more than the legal grounds. The point survives the substitution of Rule 8D from 2 June 2016, because the substituted clause (ii) is still expressed as a percentage of the value of investment 'income from which does not or shall not form part of total income' — that wording is reproduced verbatim at para 45 of the Supreme Court's judgment in CIT v. Essar Teleholdings Ltd. What has changed is the rate and the base: half a per cent of the opening and closing average under the old rule, one per cent of the annual average of the monthly averages of the opening and closing balances under the new one, capped at total expenditure claimed. Also worth noting: the Court held that the Commissioner (Appeals), having noticed the correct figure, could not decline to correct the error and 'apply his own equity' instead. If it applies to you, the first step is this: Prepare a schedule of investments split into those that yielded or could yield exempt income and those that could not — fully convertible debentures, taxable bonds, investments in foreign subsidiaries and the like are outside the average.
The assessee, mainly engaged in coal preparation, beneficiation, transportation and loading of coal, reported tax exempt income of Rs 18,26,360 for AY 2008-09 among other heads. The Assessing Officer added back Rs 19,96,242 under s.14A, applying Rule 8D by taking into consideration the total quantum of interest and arriving at that figure after multiplying it with the result of the average value of investments over the average value of assets. The Commissioner (Appeals) went into the record and found that the amount of investment attributable to dividend as on 31 March 2008 was Rs 3,53,26,800, which was less than one per cent of the total scheduled funds; he nonetheless accepted the officer's basis of calculation and directed a disallowance computed on the average investment. The Tribunal, on the Revenue's appeal, restored the Assessing Officer's determination as a true calculation in terms of Rule 8D. The matter was decided on 2015-03-24 by the High Court (S. Ravindra Bhat J and R.K. Gauba J (judgment delivered in open court by S. Ravindra Bhat J)). On those facts the High Court held as follows. The findings of the Tribunal and the lower authorities were set aside, the appeal allowed, and the matter remitted to the Assessing Officer to work out the tax effect after giving due notice to the assessee (para 5). The error was that the Assessing Officer factored in the total investment instead of the average value of investment the income from which does not form part of the total income (para 4).
Having reproduced Rule 8D(1) to (3) in full, the Court held that the Assessing Officer, instead of adopting the average value of investment of which income is not part of the total income — that is, the value of tax exempt investment — chose to factor in the total investment itself. The Commissioner (Appeals), even though he had noticed the exact value of the relevant investment, did not correct the error but chose to apply his own equity; on the record he was bound to substitute the figure of Rs 38,61,09,287 with the figure of Rs 3,53,26,800 and then arrive at the disallowance at the prescribed percentage (para 4). In the words reproduced by the source cited on this page: "The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself."
It was decided by the High Court on 2015-03-24 and is reported as ITA 615/2014 (High Court of Delhi). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 14A, section Rule 8D, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The findings of the Tribunal and the lower authorities were set aside, the appeal allowed, and the matter remitted to the Assessing Officer to work out the tax effect after giving due notice to the assessee (para 5). The error was that the Assessing Officer factored in the total investment instead of the average value of investment the income from which does not form part of the total income (para 4). It arises in Deductions & Disallowances, Capital Gains Exemptions and Assessment & Scrutiny matters, on section 14A, section Rule 8D of the Income Tax Act 1961, and was decided by S. Ravindra Bhat J and R.K. Gauba J (judgment delivered in open court by S. Ravindra Bhat J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask for the working sheet behind the officer's average and reconcile it to the balance sheet figures on the two dates (or, for the substituted rule, to the twelve monthly averages). If an appellate authority has noticed the correct figure but not corrected the computation, take that as a distinct ground — this Court treated it as an error to be set right, not a matter of discretion. Check the cap: under the substituted Rule 8D(2) the aggregate cannot exceed the total expenditure claimed by the assessee.
Still good law. A citator search returns 58 later decisions citing this judgment, and the rule it lays down for the numerator in Rule 8D(2)(iii) has been taken up as settled. A later Division Bench of the same Court applied it in Cargo Motors Pvt Ltd v DCIT (Delhi High Court, 7 October 2022): at para 15 the Bench said the point was 'no longer res integra', introduced the judgment itself - 'A Division Bench of this Court in ACB India Limited ... has held as under' - and reasoned from it that an Assessing Officer who 'chose to factor in the total investment itself' instead of the average value of tax-exempt investment had gone wrong. The Pune Tribunal applied it the same way in Kalyani Steels Ltd v ACIT (27 August 2019), remitting the computation to the Assessing Officer 'by considering only such investments ... which have yielded exempt income during the year'. It is relied on to the same effect across the Tribunal (Poonawalla Shares and Securities, Aurangabad Electricals, Techno Electric, Rashleela Enterprises). No Supreme Court decision citing it was found and no pending challenge is traceable. Nothing overruling, doubting or confining it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Full text read from indiankanoon ?type=print; para 4 re-confirmed verbatim through /docfragment/. Two oddities in the report itself. The judgment repeatedly writes the third limb as '.05%' where the Rule 8D(2)(iii) it reproduces earlier in the same judgment says 'one-half per cent' — the figure in the text is a slip, and the rate under that rule was 0.5 per cent. The sentence in para 4 that begins 'Given the record that had to be done so to substitute the figure' is ungrammatical as printed and is reproduced here as it stands. The rule set out in the judgment is the version in force before 2 June 2016. The Court also records at para 4 that the Commissioner (Appeals) 'noticed the exact value of the investment which yielded taxable income'; on the facts the figure of Rs 3,53,26,800 is the investment attributable to dividend, so read 'taxable' there as the printed text, not as the ratio. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The findings of the Tribunal and the lower authorities were set aside, the appeal allowed, and the matter remitted to the Assessing Officer to work out the tax effect after giving due notice to the assessee (para 5). The error was that the Assessing Officer factored in the total investment instead of the average value of investment the income from which does not form part of the total income (para 4).
TaxSphere, “ACB India Ltd v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/acb-india-14a-average-only-of-exempt-income-yielding-investments/ (validity last checked 2026-09-08)
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