2013 (2) TMI 739 - AT - Income Tax

Disallowance of expenses relating to exempted dividend income as per the method of computation shown by the ld. CIT(A) - Held that - We see no reasons to disturb the fair and judicious stand of the CIT(Appeals). Once it is found that an expense is specifically relatable to a taxable income, as is the undisputed position in this case, no portion of such an expense can be disallowed u/s. 14A. The allocation of general expenses vis- -vis tax exempt income and taxable income can only be made in respect of expenditure which cannot either be wholly allocated to taxable income, then or which can not be wholly allocated to tax exempt income; the allocation can be made, even on the basis of formula set out in Rule 6D(iii), in respect of such expenses which do not fall any of these categories. There is no infirmity in the stand of the CIT(Appeals). We approve the same.

Summary

Issues:
- Delay in filing the appeal
- Disallowance of expenses relating to exempted dividend income

Delay in filing the appeal:
The Assessing Officer filed an appeal questioning the correctness of the Commissioner of Income Tax (Appeals)'s order, which was delayed by 24 days. The Assessing Officer sought condonation of the delay, explaining it with a reasonable cause. The Appellate Tribunal, after perusing the petition and hearing both sides, decided to condone the delay and proceed to consider the appeal on its merits.

Disallowance of expenses relating to exempted dividend income:
The primary issue revolved around the computation of disallowance under section 14A read with Rule 6D(iii) concerning expenses incurred on tax-exempt income. The Assessing Officer excluded specific expenses related to house property income, interest expenditure, and De-mat charges, allocating the remaining expenses to tax-exempt income based on a ratio of tax-exempt receipts to total receipts. The CIT(Appeals) upheld the assessee's contention that certain expenses exclusively related to building maintenance and service expenses, which were erroneously included in the general allocation for disallowance. The CIT(A) found these expenses directly linked to earning rent and business income, not general in nature. Consequently, the Appellate Tribunal agreed with the CIT(A)'s decision, emphasizing that expenses specifically related to taxable income cannot be disallowed under section 14A. The Tribunal affirmed the CIT(A)'s order, dismissing the Revenue's appeal.

This judgment clarifies the principles governing the disallowance of expenses related to exempted dividend income under section 14A. It underscores the importance of correctly attributing expenses to taxable or tax-exempt income and highlights that expenses directly linked to taxable income cannot be disallowed. The decision provides clarity on the allocation of expenses and sets a precedent for future cases involving similar issues.