2014 (9) TMI 996 - AT - Income Tax

Disallowance u/s 14A - CIT(A) deleted the addition - Held that - Exempt income of assessee comprised of interest on tax paid, relief bonds accrued and PPF interest for which journal entries were passed at the end of the year and dividend income was credited in the bank through ECS, hence, no expenditure incurred were referable and relatable to the exempt income. The ld. CIT(A) further observed that the A.O. has also not given any finding as to whether the assessee has made a claim of expenditure in relation to exempt income and the claim is not correct. The categorical finding has been recorded by the ld. CIT(A) to the effect that the assessee has earned dividend income of ₹ 10,245/- which has been directly credited to the bank through ECS. The interest of ₹ 69,901/- received on PPF, for which a journal entry was passed on 31-3-09 and similarly interest of ₹ 66,02,652/- on tax free bonds is credited by journal entries passed on 31-3-09. Thus, no expenditure has been incurred for earning exempt income. From the records, we also find that the expenditure mentioned by the A.O. was in relation to the professional income earned by the assessee which is taxable under the Income Tax Act, there is no reason to disallow the expenses incurred for earning the taxable income. The findings so recorded by the ld. CIT(A)has not been controverted by the Department by bringing any positive material on record. Accordingly, we do not find any reason or infirmity with the order of the ld. CIT(A) in deleting the disallowance made by the A.O. u/s 14-A of the Act - Decided in favour of assessee

Summary

Issues Involved:
Appeal against deletion of addition under section 14A r.w. Rule 8D - Justification for deletion of addition - Reliance on previous year's order - Disallowance of expenses in relation to exempt income - Proximate cause for disallowance - Exempt income comprising various sources - Crediting of income through ECS and journal entries - Determination of expenditure incurred in relation to exempt income - Finding of the Assessing Officer - Deletion of disallowance by CIT(A) and Tribunal.

Analysis:

1. Deletion of Addition under Section 14A r.w. Rule 8D:
The appeal was filed by the Revenue against the order of the ld. CIT(A) for the A.Y. 2009-10, challenging the deletion of an addition under section 14A r.w. Rule 8D of the Income Tax Act, 1961. The Revenue contended that the ld. CIT(A) unjustifiably deleted the addition of a specific amount, despite the Assessing Officer's disallowance under section 14A. The issue revolved around whether the provisions of section 14A were correctly applied in the case, considering the nature of the exempt income and the related expenses.

2. Reliance on Previous Year's Order:
Another ground of contention was the reliance placed by the ld. CIT(A) on the previous year's order, which the Revenue argued was inappropriate as the facts of the present case differed. The dispute centered on whether the ld. CIT(A) erred in ignoring the distinctions pointed out by the Assessing Officer between the current and previous assessment years, and whether such reliance was legally justified.

3. Disallowance of Expenses in Relation to Exempt Income:
The core issue involved determining whether the expenses incurred by the assessee were directly related to the exempt income received. The Assessing Officer disallowed a specific amount, alleging that the assessee had incurred various expenses such as office maintenance, motor car expenses, and others, which were indirectly linked to the exempt income sources. However, the ld. CIT(A) disagreed and deleted the addition after analyzing the nature of the exempt income and the absence of direct expenditure attributable to it.

4. Proximate Cause for Disallowance:
The concept of proximate cause for disallowance under section 14A was crucial in this case. The ld. CIT(A) emphasized that no expenditure had been incurred for earning the exempt income, as evident from the method of crediting income through ECS and journal entries. The absence of a proximate cause for disallowance, as established in relevant case laws, formed a significant basis for deleting the addition made by the Assessing Officer.

5. Exempt Income Comprising Various Sources:
The exempt income of the assessee included interest on tax-free bonds, PPF interest, and dividend income, which were credited through different means like ECS and journal entries. This composition of exempt income played a vital role in determining the applicability of section 14A and the justification for disallowance of expenses by the Assessing Officer.

6. Deletion of Disallowance by CIT(A) and Tribunal:
Ultimately, the Tribunal upheld the decision of the ld. CIT(A) in deleting the disallowance of the specified amount, emphasizing that no expenditure was incurred for earning the exempt income. The Tribunal's decision was supported by the analysis of the nature of expenses, the method of income crediting, and the absence of a direct link between the expenses and the exempt income sources.

In conclusion, the judgment addressed various aspects related to the application of section 14A, the determination of expenses in relation to exempt income, the significance of proximate cause for disallowance, and the reliance on previous orders. The decision highlighted the importance of analyzing the specific circumstances of each case to ascertain the legitimacy of disallowances and the correctness of deletions based on factual and legal considerations.