2015 (3) TMI 1111 - AT - Income Tax

Disallowance u/s 14A - Held that - AO has to examine the nature of expenditure vis-a-vis the earning of the exempt income. Here in this case the assessee had offered ₹ 2,40,000/- for the purpose of disallowance. However, the AO without examining the same has proceeded to apply rule 8D, as if it is a natural corollary to section 14A. The basic requirement the law is to examine the nature of the expenditure which can be said to attributable for the earning of the exempt income. If the assessee has incurred major expenditure for its core business, then it is incumbent upon the AO and is mandatory for him to examine the nature of expenditure and satisfy himself about the assessee s claim as to whether any expenditure has been incurred for the purpose of earning exempt income and then he has to quantify the expenditure. Here in this case, only clause (iii) of Rule 8D has been invoked by the AO to work out the indirect expenses, without satisfying himself about the assessee s correctness of the claim. In absence of satisfying the mandatory requirement as given in sub-section (2) of section 14A, the disallowance offered by the assessee under rule 14A cannot be tinkered with and also it appears to be reasonable looking to the overall indirect expenditure incurred by the assessee. - Decided in favour of assessee

Summary

Issues:
Disallowance under section 14A r.w. Rule 8D for the assessment year 2001-02.

Analysis:
The appellant, a company engaged in construction and property development, contested disallowance u/s.14A for exempt dividend income. The Assessing Officer calculated disallowance at Rs. 26,45,200, while the CIT(A) confirmed it, citing rule 8D applicability from 2008-09. However, the CIT(A) excluded certain investments from the disallowance calculation due to taxable interest and capital gains. The appellant argued that its core business did not warrant such a high disallowance, offering Rs. 2,40,000 already. The appellant's counsel contended that the AO failed to examine the nature of expenses before applying rule 8D, which is not mandatory in every 14A case. The Tribunal agreed, emphasizing that the AO must verify if expenditure relates to exempt income before making disallowances. As the AO did not follow this procedure, the Tribunal allowed the appeal, finding the appellant's offered disallowance reasonable given its overall expenses.

In conclusion, the Tribunal ruled in favor of the appellant, emphasizing the importance of assessing the nature of expenses related to exempt income before applying rule 8D. The judgment highlighted that rule 8D is not mandatory for every 14A case and must be applied judiciously after verifying the expenditure's relevance to earning exempt income. The Tribunal found the appellant's offered disallowance reasonable and allowed the appeal, emphasizing the necessity for the AO to follow due procedure in such cases.