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Issues involved:
The only issue in appeal relates to the disallowance of a sum of Rs. 3,90,267 by invoking the provisions of section 14A on account of attribution of expenses for earning dividend income which is exempt under section 10(33) of the Act. Details of the Judgment: Issue 1: Disallowance of expenses under section 14A The assessee earned dividend income from mutual funds which was claimed as exempt under section 10(33) of the Act. The Assessing Officer disallowed a portion of expenses as incurred for earning dividend income, estimating 5% of the expenses. The Assessing Officer relied on the decision of the Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. [1993] 200 ITR 488 to make the disallowance. Before the CIT(A), the assessee contended that no specific expenses were incurred for earning exempt income, therefore, no ad hoc disallowance should be made under section 14A. However, the CIT(A) upheld the disallowance, considering the increase in other income and investments in mutual funds, indicating efforts and resources applied to earn exempt income. The assessee further appealed, arguing that under section 14A, only expenses directly related to earning exempt income can be disallowed. The counsel for the assessee emphasized the necessity of a nexus between incurring expenses and earning income for any disallowance to be valid. The Tribunal held that there must be a direct connection between incurring expenses and earning exempt income to disallow them under section 14A. Estimation of expenses without such nexus is impermissible. The Tribunal referred to precedents like Wimco Seedlings Ltd. and Citicorp Finance (India) Ltd. to support this interpretation. It noted that the provisions for quantification of disallowance were inserted in 2006 and are not retrospective. As no method for computation was prescribed, the disallowance of expenses under section 14A was deleted. In conclusion, the appeal was allowed, and the disallowance of Rs. 3,90,267 was deleted.
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