2014 (6) TMI 929 - HC - Income Tax

Disallowance u/s 14A - Held that - The assessing authority should take note of these develpoments in deciding whether any expenditure is incurred in earning the said income. The discussion by the assessing authority clearly demonstrates these aspects has not been taken note of and the notional expenditure is calculated pre modernization. When the assessee has not incurred any expenditure for realizing this income, the question of holding that 2% of the gross total income is an expenditure and that has to be added back to the income is unsustainable in law. - Decided in favour of assessee.

Summary

Issues:
1. Whether expenditure can be attributed to exempted income earned by the assessee?
2. Interpretation of Section 14A of the Act regarding estimation of expenses for exempted income.

Analysis:
1. The appeals pertained to assessment years 2003-2004 and 2002-2003, involving substantial questions of law regarding the attribution of expenditure to exempted income earned by the assessee. The Assessing Officer estimated expenses at different amounts, which were subsequently reduced by the Appellate Commissioner to 2% in accordance with Section 14A of the Act. The tribunal reversed these findings, holding that no expenditure could be attributed to the exempted income amounts. This decision was based on the principle that when no expenditure is incurred in earning dividend income, no notional expenditure can be deducted. The court referred to a previous case where it was held that if no expenditure is incurred in earning such income, the gross income becomes the net income, precluding any further deductions. The court emphasized that with advancements like computerization and online transactions, no human agency is involved in collecting such income, eliminating the need for any expenditure by the assessee. Therefore, the tribunal's decision aligns with the legal principle that no expenditure can be attributed to income earned without incurring costs.

2. The court's analysis further delved into the specifics of the income sources, such as dividends under section 10(33) of the Act, interest on tax-free bonds under section 10(15)(h), and interest on long-term finance to infrastructure companies under section 10(23G). It highlighted that these incomes were credited to the assessee's account through electronic transfers like NEFT, RTGS, and DEMAT accounts, without any manual intervention or associated expenditure. The court emphasized that the assessing authority should consider these technological advancements while determining the incurring of expenditure for earning income. It concluded that in the absence of any actual expenditure by the assessee in realizing such income, the notion of attributing 2% of the gross total income as expenditure and adding it back to the income was legally unsustainable. Therefore, the court ruled in favor of the assessee, dismissing the appeals and answering the substantial questions of law in favor of the assessee and against the Revenue.

In summary, the judgment clarified the legal position regarding the attribution of expenditure to exempted income and provided a detailed analysis based on the specific circumstances and legal principles involved in the case.