S. 14A/ Rule 8D does not apply to short-term investments, gains from which are taxable

In AY 2008-09 the assessee received tax-free dividend on its investments. The AO applied Rule 8D and computed the disallowance u/s 14A. Before the Tribunal, the assessee argued inter alia that s. 14A and Rule 8D did not apply to short-term investments as the gains arising on their transfer was chargeable to tax. HELD by the Tribunal:

Some of the investments made by the assessee are short term. Since assessee is paying capital gains tax on short term investments, Rule 8D will not apply on them and the AO is directed to recompute disallowance u/s 14A read with Rule 8D after excluding short term investments.